Pandora Media Inc's Future Is Bright

Pandora's next leg of growth is underway, and it isn't in mobile.

Jun 9, 2014 at 3:32PM

Investors, turn up to the volume and listen to why Pandora's (NYSE: P) next growth initiative isn't taking place on desktop or mobile devices. Pandora is positioning itself for long-term growth by expanding its presence in automobiles to take advantage of favorable statistics which could generate $1 billion annually, according to analysts.

Pandora in cars?
Many investors are unfamiliar with Pandora's entrance into cars. In fact, Sirius XM Radio (NASDAQ:SIRI) is considered by some to be the only player offering streaming music in the car. 

With Pandora positioned in cars, the company has the potential to capture a larger audience base. In-car advertising could compose a significant long-term revenue growth opportunity for Pandora. In fact, the company could offer a more compelling thesis for advertisers to pay a higher rate given the higher amount of information about the user such as location and car make.

Pandora is now integrated in 135 different car models, including all of the top 10 best-selling cars in the U.S. market. One third of new cars in the U.S. have Pandora integration.

Michael Pacther of Wedbush Securities concluded that nearly half of all radio listening occurs in cars, as such Pandora's average monthly listening per user of 22 hours lags the average of 55 to 60 hours. 

Pandora and Sirius can co-exist
According to Gartner, 31% of motorists surveyed in the U.S. want streaming media connectivity in their cars versus 13% who want satellite radio connectivity. Naturally, this data does not bode well for Sirius XM whose technology is a decade old.

Nevertheless, it appears consumers aren't ditching Sirius XM for Pandora, based on Sirius XM's 1.9% churn the company reported in the first quarter. In fact, in the first quarter Sirius XM's subscriber base reached a record of 25.8 million.

During an investor conference, Pandora's Chief Financial Officer Mike Herring characterized the company's objectives and how it relates to Sirius XM:

So managing yield out of that ad load is actually more of a priority toward to-date than it is figuring out how to sell that one more ad or increase that ad load another ad or two. If the latter was our goal, it would be a race to the pit [that] Sirius Radio is in right now. And that's not what we want. We want to be able to monetize very effectively and relatively very low ad loads so that the listening experience stays really at a high level.

In fact, during the same conference Herring said that he believes 15% to 20% of all radio listening is non-music related such as sports, news and entertainment, serving as further proof that Pandora and Sirius XM won't compete directly in certain aspects.

Sirius XM dominates the non-music in car radio service with multiple sports stations, top notch entertainment in the form of Howard Stern, multiple news networks including CNBC, CNN and religious themed channels such as the recently announced Joel Osteen channel.

Bottom line
Pandora certainly has a long term growth prospect in the auto market given the substantially larger audience.

Both Pandora and Sirius XM are positioning themselves for long term growth in this market. Investors that can stomach some short term volatility and invest for the long term could find Pandora attractive as it aims to take share from Sirius XM.

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Jayson Derrick has no position in any stocks mentioned. The Motley Fool recommends Apple and Pandora Media. The Motley Fool owns shares of Apple, Pandora Media, and Sirius XM Radio. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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