Sirius And Spotify Should Push Pandora Stock Down To $9.50

Forbes

Pandora Media reported its Q3 fiscal 2011 earnings recently, and based on continued fast growth and slight cost improvements, we have revised our price estimate to $9.48.  Shares closed Friday at $10.78.

Although the company’s results have been on track, the stock is still an expensive proposition, especially in the face of emerging competition.

Pandora’s competition comes from radio services such as Sirius XM as well as emerging Internet-based music services such as Spotify, which is expanding via Facebook.

See our full analysis for Pandora

Inflated expectations overshadow solid earnings

The company continued its fast paced growth but overall, it stayed in line with our expectations except for a minor revenue increase. The company’s total listener hours and revenue doubled from the same quarter last year, but this was not something unexpected.

Nevertheless, we did notice some improvements among cost items compared to our previous expectations. This was most prominent for sales and marketing expenses.

New Efforts Continue

The company signed a deal with DMX recently, which is a provider of background music at businesses. With this new partnership, Pandora will be able to penetrate into business customer segment and add a new dimension to its customized service. \

Furthermore, Amazon’s new Kindle Fire launch with several apps including one for Pandora that will help the media company expand its distribution channel.

Competitive Threat Rising So far one of the prominent threats that Pandora was facing was Clear Channel Radio’s iHeartRadio app and website that threatened to challenge Pandora’s uniqueness. Now even Sony has come up with a similar feature for its music service.

Pandora has enjoyed fast paced growth so far, but with heightened competition catching up as well as social network based music services like Spotify growing, the company may not enjoy similar growth in future. This could manifest in terms of slowdown in number of listener hours per user.

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