Pandora Media (P) will report its Q4 fiscal 2013 earnings on March 7, and in addition to the growth in active users, the level of monetization and cost pressure will be in focus. The company's stock has fluctuated a lot since the launch of its IPO in 2011. While the service is great, the business model faced scrutiny and the Internet radio company still remains unprofitable. Pandora has been making some efforts in this direction, and while there has been a substantial improvement in monetization, content costs (as % of revenues) have still been increasing over the past two years. It will be interesting to see what the fourth quarter's results indicate in this regard.
Mobile Monetization Expected to Improve
We estimate Pandora's desktop monetization at $57 per 1,000 listener hours, and its mobile monetization to be around $22 per 1,000 listener hours for the calendar year 2012 (fiscal 2013). There is clearly a large gap, and given that the bulk of growth is coming from the mobile platform, there are serious concerns around Pandora's profitability. However, with higher sell-through of mobile inventory, the company has substantially improved its monetization over the last few years. We expect a further improvement in the fourth quarter.
Close to 75%-80% of the total listener hours now come from the mobile platform for Pandora. However, the company currently does not have a large enough sales force in many regional radio ad markets to sell inventory and establishing this sales force will be the key to higher sell-through rates for its ad inventory. Over time, as the mobile listener hours growth slows, Pandora should continue pushing sales of its mobile ad inventory and eventually mobile monetization levels should catch up with current desktop levels. Radio ad buyers are for the most part indifferent about placing their ads on the mobile or desktop platforms since traditional radio has forever been a mobile platform. Therefore, the company is confident about its ability to improve mobile monetization to sustainable levels in the future.
Subscriber and Listener Hour Growth Is Fast, But Slowing Down
Pandora's subscriber and listener hour growth will continue to remain healthy but slightly lower than what we have seen previously. The growth is being driven by booming sales of connected devices such as smartphones and tablets as well as Pandora's launch in Australia and New Zealand.
Pandora periodically releases its monthly metrics. Reports for the last few months indicate that the growth in active users and listener hours is slowing down. For the third quarter of fiscal 2013 (calendar 2012), the growth figures for Pandora's active users and listener hours stood at 47% and 67%, respectively. These figures have been steadily declining since then, amounting to 38% and 47%, respectively, for January 2013. Growth is bound to slow down as the company has already covered the majority of the U.S. market and the competition is increasing. However, the slower growth will give an opportunity to Pandora to better monetize its mobile platform and focus on directly selling its ad inventory.
Our price estimate for Pandora stands at $9.75, implying a discount of about 25% to the market price.
Disclosure: No positions.