Pandora (P) reported phenomenal numbers after the close on Wednesday. It beat analyst EPS estimates by $0.08 per share, and revenue estimates by $6 million. But most importantly Pandora's total user listening hours, and active users reached continue to grow at an exceptional rate. Not only has Pandora been able to show massive growth yoy (year over year) in both those categories, but it's also seen growth sequentially (quarter over quarter) as well.
Let's take a quick look at both Pandora's user listening hours (URL) and active users reached (AUR) since going public.
| Date | AUR (millions) | URL (billions) | Share of US Radio |
| Q2 2012 | - | 1.8 | 3.6% |
| Q3 2012 | 40 | 2.1 | 4.3% |
| Q4 2012 | 47 | 2.7 | 5.55% |
| Q1 2013 | 51.9 | 3.09 | 5.95% |
As you can see Pandora has grown dramatically in almost every key metric since going public about 11 months ago. But what's amazing is that Pandora still has less than 6% of total US radio listening, meaning there is plenty of room for growth.
Another interesting thing to note from Pandora's Q1 release is the dramatic increase in spending on both content acquisition and marketing. The increase in marketing can be attributed to attempting to increase the amount of advertisers and monetization on Pandora's unique advertising platform. Content acquisition's major jump, was primarily because of increasing listener hours. As Pandora goes through a very high growth period, seeing expenses rise because of investments in it's own business, should be looked at as a long term plus.
The traditional radio advertising market is $17 billion (from Q113 conference call - see transcript). Pandora's FY 2012 revenue? Just $274.3 million, and only $239.96 million came from advertising. So despite having almost 6% of total radio listening hours, Pandora only has about 1.4% of total radio advertising revenue. This means that Pandora will be able to grow revenue not only through growth in users, and listening hours, but dramatically through increased monetization efforts as well.
Not only that, but Pandora has a very unique advertising platform that combines both its strong mobile and its desktop presence. With more specific music channels than traditional radio, it allows for ads that can be more personalized and thus have more value to advertisers. Pandora's advertising platform takes advantage of mobile users (its fastest growing category) more effectively than most apps, because ads aren't seen, rather they are heard. As Pandora rapidly innovates within its advertising platform (new things like having Triton track radio audiences to get more reliable/meaningful data) we should see user monetization increase. Even on the Q1 call "increased monetization" was mentioned because of the new Triton audience metrics.
Theoretically Pandora's ads should be more valuable than traditional radio's (assuming comparable listening metrics, see Triton), so instead of earning what traditional radio stations earn for advertisements, Pandora should earn more. Yet, ironically as mentioned above they are earning a lot less (6% market share yet only 1.4% of revenues). If Pandora is able maximize its advertising potential through Triton's new metrics, then we should see user monetization, and revenue rise faster then user growth.
Almost half of all radio is listened to in cars. Pandora just announced new relationships with Nissan (NSANY) and Suzuki (SZKMY.PK). Pandora will even be integrated into Nissan's new Ultima this summer, and integrated in Suzuki cars through the use of a Garmin GPS system later this year. There are already 48 car and truck models with Pandora availability, and there will be 10 more in 2012 (that have been announced so far). Pandora has just barely tapped its full potential in the automotive market, and clearly is showing excellent progress on that front.
Conclusion
Overall Pandora reported excellent sequential growth across almost all key metrics in Q1 (despite Q1 being traditionally weak, according to management). With raised guidance for full FY 2013, and easier user monetization because of Triton audience metrics, Pandora will continuing to rapidly grow its top line. Although Pandora isn't profitable yet, and probably won't be for the next year or two, its valuation is still relatively cheap. Pandora is currently trading (as of Wednesday's close, using FY13 estimates) at 4.1x revenue, which isn't bad at all considering it's shown over 50% yoy revenue growth.
Competitor Sirius XM (SIRI) trades around 2.3x revenue despite only 10-15% yoy growth. Although Pandora is pricier, its growth prospects are much better, and its user monetization is in its early stages. Paying 4.1x revenue, with a 50%+ growth rate, will seem very cheap if Pandora can ever capitalize on its soaring revenue streams.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
