Pandora Media Inc (P): What Will Push This Stock?

Pandora Media (P)Pandora Media Inc (NYSE:P)‘s stock price exhibited a downward trend during the previous fiscal year. The company went public approximately two years back, and by the end of 2012, its stock price was trading at only 60% of its initial market value.

Pandora Media Inc (NYSE:P)’s top line relies heavily on its active user base. It is these active users who contribute to Pandora’s earnings, thus, it becomes essential for potential investors to comprehend how growth in active users relates to its overall profits and the stock price.

Pandora defines active users as a percentage of registered users that have accessed Pandora’s services during the last 30 days from the end of each calendar month. Recently, Pandora reported a registered user base of 175 million, however, active users stood at approximately 66 million. This implies that only 38% of the total registered users were actively accessing Pandora’s internet radio services.

During 2008, Pandora reported an active user base of 7 million; however, by the end of 2012 it grew to a staggering 66 million, implying an average annual growth rate of just below 80%. The smashing success of Pandora Media Inc (NYSE:P) in the U.S. is underpinned by “personalization algorithm” and growing popularity of smart devices.

Nonetheless, the exponential growth exhibited so far by Pandora is expected to slowdown, as competitors are likely to catch up and the market will eventually get saturated.

Estimating the size of Pandora’s target market

Pandora Media Inc (NYSE:P) currently has presence across the U.S, Australia, and New Zealand. It can be assumed that the company will avoid an aggressive international expansion plan in the near-term, and instead focus on achieving profitability in its current markets.

According to the U.S. census bureau, the present population of the U.S. is 315 million, approximately. Nearly 14% of the entire population is under 10 years of age, and another 13% is above 64 years of age. Let’s assume individuals falling under these age categories are not likely to use Pandora.

This leaves us with an addressable size of 73%, which implies a potential target market of 230 million. Given that Pandora already has 175 million registered users suggests there is little room for growth within the U.S., as competitors such as Sirius XM Radio Inc (NASDAQ:SIRI), Apple Inc. (NASDAQ:AAPL)’s iTunes, and Spotify offer similar radio services.

The active user base of Pandora Media Inc (NYSE:P), which stands at 38% of its total registered users, might struggle to build any consistent momentum due to increasing competition and the company’s strategy to concentrate more on profitability, rather than just user growth.

Increasing demand for smart devices could drive the active user base

Internet-enabled mobile devices make it extremely easy for users to access Pandora’s internet radio services from remote locations. Therefore, it is no surprise that the mobile platform contributes approximately 80% to Pandora’s listener hours.

The rapid increase in demand and the popularity of smartphones has helped Pandora report exponential growth over the last few years, especially in the U.S. During 2011, total smartphone sales stood at 430 million units, and the growth continued as smartphone sales grew 47% and 38% in Q3 and Q4, respectively, of the last fiscal year.

The demand for smartphones is expected to grow at a robust pace. Pandora Media Inc (NYSE:P)’s music app on iOS, Android, BlackBerry, and Windows-based smartphones is already one of the most preferred music apps around today, hence, Pandora’s growth will heavily rely on the future demand for smart devices.

I believe the smartphone market will grow at a rapid pace, and I expect Pandora’s active user base to grow along.