Pandora Media's Next Big Opportunity: Connected Cars
Corey Barrett of Pacific Crest Securities thinks that Pandora Media (NYSE: P) has a massive opportunity for growth in connected cars and could rival the dominance held by SiriusXM Radio as soon as 2017.
Pandora will benefit from a shift in how automakers are moving towards bringing new technology to cars. Historically speaking, automakers have shied away from bringing in new technologies, given the benefits of maintaining consistency for servicing reasons.
The time is now for automakers to ditch their outdated practices and respond to the dramatically increasing consumer demand for cars to have built-in connectivity and streaming services ranging from music, news and sports.
In a note to clients on Tuesday, Barrett believes that Pandora could increase its penetration to new cars to 75 percent in 2017, up from 33 percent in 2013. A 75 percent penetration rate implies that the streaming radio service would be available to 11 million to 12 million new vehicles on an annual basis, as many as SiriusXM.
To achieve this level of growth, Pandora will continue adding approximately 50 new models with some form of Pandora integration per year.
“We expect Pandora to see rapid growth in penetration of automobiles, and see little reason why the service won't be ubiquitous across autos long-term, just as the service is currently across mobile devices,” Barrett wrote in his note to clients.
Barrett has a long-term growth projection and speculates that Pandora could be accessible to 15 million users by 2017 with this figure skyrocketing to 100 million cars by 2021, which could be attractively monetized to the tune of $1 billion a year in 2022.
Recent pullback a buying opportunity
Pandora will continue its mobile monetization initiatives as a key driver for growth in 2014, as the connected car opportunity is an “extremely fertile and incremental” growth initiative, according to Barrett, who views recent dips in shares as a buying opportunity.
“We expect continued expansion in local ad sales to drive improving monetization for the foreseeable future and continue to see upside potential to 2014 estimates,” wrote Barrett.
Part of the reason for the recent pullback in Pandora shares has been a slowing growth rate in the smartphone market. As first-time smartphone buyer growth slows, so does Pandora's active user growth. As such, Barrett believes that growing saturation of mobile device ownership will drive near-term user growth below previous expectations.
Despite a lowered user-growth projection, Pandora's active listener base more than justifies a large enough listener base for ads, especially in mobile where monetization is independent of near-term listening hours.
Shares are Outperform rated with a $45 price target.
Despite the bullish comments from Barrett and an upgrade from Maxim's John Tinker, shares of Pandora are now trading in negative territory, down about 0.2 percent. The stock has given up all the earlier gains as the broader indices have come down. The stock traded as high as $26.53 earlier.
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