Competitive threats
Pandora primarily competes with Sirius XM Radio Inc (NASDAQ:SIRI), Apple Inc. (NASDAQ:AAPL), and Spotify in the domain of radio services. Sirius XM Radio Inc (NASDAQ:SIRI) generates highest percentage of its overall revenue through satellite radio services, at around 87%. The remaining 13% is split between equipment, royalties, and advertising. The company has a market cap of $20.3 billion and trades at around 93% of its 52-week high.
Sirius’ current subscriber base is estimated at 23 million; however, according to the projections of Trefis, the subscriber base is expected to reach 36 million by the end of 2019. Further, the average revenue per subscriber by the end of 2012 was estimated at $124; nevertheless, Trefis estimates the figure to reach $174 by the end of 2019.
Similarly, Pandora also competes with Apple’s iTunes. Paying users can download content from iTunes and integrate it across Apple’s products (iPod, iPad, iPhone). It is noteworthy that iTunes and iOS contribute approximately 5.16% to Apple’s overall revenue. According to the valuation offered by Trefis, iTunes accounts for 1.11% of Apple Inc. (NASDAQ:AAPL)’s stock price.
During fiscal 2012, iOS applications and iTunes generated revenue and gross profit of $8.5 billion and $1.82 billion, respectively. Apple operated at a gross margin of 21% for the same; however, the overall gross margin for the company was at around 42% during fiscal 2012.
Importance of an active user base
Going forward, if Pandora Media Inc (NYSE:P) manages to synchronize its growth with rapid increase in demand for smartphones, then the active user base for Pandora can blow past 100 million. Nonetheless, if it stays ahead of its competitors and expands internationally, then the active user base may even report exceptional growth (130 million or above) and outdo current expectations.
According to Trefis, if Pandora’s active user base can reach a whopping 140 million, then there may be a 25% upside to its stock price. However, if it remains under the 100 million mark, there may be a heavy downside to its stock.
It must be comprehended by investors that Pandora Media Inc (NYSE:P)’s stock is extremely responsive to the growth in active user base. Other than growing its active user base, the immediate concern for the company must be to deliver consistent profits.
Going forward, in addition to growth in active user base, Pandora must control royalty costs in order to operate on high margins and develop incrementally to capitalize on the mobile platform.
The article Growth in Active User Base Will Drive This Stock originally appeared on Fool.com and is written by Ashit Gulati.
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