We are initiating coverage of Pandora Media (NYSE:P) with an OUTPERFORM rating and a 12-month price target of $14. We believe Pandora, which provides personalized Internet radio to the computers, mobile devices, and other connected devices of its users, is well-positioned to increase its share of Internet radio and all radio listening time due to its appealing content, strong value, expanding addressable market, and revenue growth potential.
Pandora’s (NYSE:P) rapid user growth rate easily outpaces those of its terrestrial and satellite radio peers. As of July 2011, Pandora’s active users grew by 76% y-o-y, to 37 million, while terrestrial radio’s audience increased only 1%, to 191.9 million, and satellite radio’s ending subscribers increased by only 8%, to 21.0 million.
We believe that over time Pandora (NYSE:P) could dramatically increase revenue growth by delivering ads more frequently. Pandora’s rapid user growth can be attributed to offering quality content with unobtrusive display, audio, and video advertising. We think that Pandora could gradually increase the number of advertisements shown per hour without alienating its customer base. A combination of a growing customer base and additional advertisements per hour would allow Pandora to exponentially grow its advertising revenue and expand margins.
We believe that solid revenue growth, combined with effective cost control, will lead to a profitable year by FY:13. Although revenue growth should subside somewhat in FY:13 due to a difficult comp and saturation of its core PC market, we concede that rapid revenue growth so far has increased forecasting difficulty. SG&A growth is expected to moderate as the business matures.
Pandora (NYSE:P) is well-positioned to benefit from the rapid growth of mobile advertising due to its popularity on mobile devices. Pandora listener hours on mobile devices accounted for 50.5% and ≈ 70% of total listener hours for fiscal year 2011 and the three months ended July, 31, 2011, respectively, up from 4.6% for fiscal-year 2009. The mobile advertising market is likely to experience significantly.
Michael Pachter is an analyst at Wedbush Morgan.