Piper Jaffray Initiates Pandora at Neutral With $13.00 Price Target

launched coverage on Pandora Media

with a Neutral rating and $13.00 price target on Tuesday. The analysts praised Pandora's growth metrics and market leading position in the internet radio industry, but noted that the company's business model is unproven and new competitors will present significant challenges. Analysts also said that there are "structural flaws" in the entire internet radio space. Piper Jaffray wrote that "management has done a commendable job to date establishing its market leading position (and legitimizing the streamed music model for consumers), but we see inherent structural flaws in the internet radio industry, a debatable business model, and the entrance of new competitors limiting options from here." Piper Jaffray argues that Pandora needs to improve its ad monetization in order to offset slowing listener growth. They said that it is unlikely that the company will be able to increase its number of ads, and instead would have to rely on raising effective rates "substantially" to generate profits. Piper Jaffray also said that Pandora is currently hamstrung due to poorly structured music licensing deals. Also working against Pandora is the emergence of significant competition from companies such as Spotify and Songza. "We expect the multi-flanked attacks will make it difficult for management to navigate," Piper Jaffray said in its report. Pandora does have distinct advantages over its competitors. It currently commands 72% of internet radio market share in terms of listening hours and is the leading publicly traded company in the space. Pandora's revenues have been skyrocketing on a relative basis in recent years. At the end of 2009, the company recorded annual revenue of just $19.33 million. By 2011, this number rose to nearly $138 million. Analysts are estimating that Pandora will record revenues of $425 million in fiscal 2013 and more than $609 million in 2014. Pandora offers a unique and consumer pleasing service. The company is the "custodian" of the Music Genome Project, and its service is cutting edge in every way. Pandora plays musical selections similar to song suggestions entered by the user. The user then can offer positive or negative feedback which the service takes into account in its next song selection. In this way, the user's listening preferences are determined and become highly specified based on their feedback. The company, based in Oakland, California, went public on the New York Stock Exchange in June 2011. Since its first day of trading the stock has dipped less than 24%, but now is well below its $16.00 IPO price. On Tuesday, the shares have lost around 1% and are trading at $10.26. The company is currently not profitable, but analysts are projecting that in fiscal year 2014, Pandora will report a profit of $0.05 per share. At current levels, Pandora has a market cap of just over $1.7 billion. One of the key factors that will drive Pandora's share price going forward will be market sentiment surrounding young and unproven internet companies. Numerous stocks that would fit this description for 2012, as most of them that have gone public in only the last couple of years have been hurt by averse sentiments with regard to this sector. Examples include Facebook

, Groupon

, and Zynga

to name a few. If sentiment were to shift in this entire group of companies, Pandora would likely be a large beneficiary.