What's the Right Entry Point for Pandora?

| About: Pandora Media (P)
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There is no doubt about it: Pandora (NYSE:P) is a speculative stock play. The company went public a couple of months ago and there is not much for investors to bet on yet other than their gut instincts about whether or not this company will be a success story.

Pandora enjoys high brand recognition and has become a smart phone staple. The company boasts over 100 million registered users, of which 36 million are considered active. Impressive as these numbers might be, they are meaningless unless Pandora can figure out a way to monetize them.

While some investors love a speculative play, others want to have a bit more meat and potatoes when making an investment decision. Maxim Group analyst John Tinker has taken a deeper look at Pandora, and while there are still no solid numbers to digest, he has managed to build a model that puts a $23 price target on Pandora.

Some interesting points made by Tinker:

  • About 15 million smart phones are bought every quarter, of which half download the Pandora app.
  • Pandora estimates that about 60% of its listening hours now take place over mobile devices and 40% over desktop.
  • Mobile advertising is expected to grow 68% a year, from $877 million in 2010 to $6.8 billion in 2014.
  • 7% of all music consumption now happens over mobile, while only about 1% media ad spending is on mobile – a significant mismatch..

Maxim is maintaining earnings estimates and assumes that revenues will grow 91% in FY12 to $263 million. For FY13, it forecasts an increase of 56% to an impressive $410 million. It also sees additional upside from the increase in advertising per listening hour from one minute to about 13 minutes. Even at 13 minutes, Pandora would still be substantially lower than terrestrial radio.

Is Pandora a $23 stock? That answer will come with time. The key is how much risk you want to absorb before we begin to see the company report numbers and issue guidance.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.