Credit: Pandora.

Now that (NASDAQ:AMZN) has launched its ad-free Prime Music service, some are questioning whether it's time to sell Pandora (NYSE:P) stock. I think that would be a mistake.

Prime Music is materially different from Pandora and rival Spotify. Both those services feature much larger catalogs, while supplying a richer playback experience. Pandora goes even further by creating a tailored music experience via its recommendations engine, based on 15-years work on the Music Genome Project.

The result? A business that analysts say is on track to grow profits more than 40% annually during the next five years -- disruptive growth that, I think, will be worth $15 billion in market cap by 2018, a near triple from today's prices.

How we'll get there
My thesis hinges on three key assumptions:

1. There's still magic in music discovery. Spotify and iTunes have done well helping audiophiles to build playlists. Prime Music is great for ad-free listening to favorite tracks from a limited catalog. Yet, none of these services offer the serendipity of radio. Pandora solves that problem while leveraging the Music Genome Project to give listeners more of what they'll like.

2. Pandora can capture a big portion of the ad dollars currently assigned to terrestrial radio stations. According to BIA/Kelsey, the total ad opportunity is on track to grow to $17 billion by next year. That's a huge number. In fact, Pandora could meet analysts' estimates for 25% annualized revenue growth over the next four years and still control only a small portion of the overall market.

3. Pandora should trade at a premium to industry peers. At present, Pandora trades for 7.6 times sales versus 2.8 for the broadcast-radio industry. A heady premium, to be sure, but deserved when you consider that Pandora is growing fast while disrupting the entire market for terrestrial radio. What's more, history  downplays the impact of new entrants such as Prime Music. Pandora scored huge gains in almost every area of the business in the fourth quarter, and that's in psite of a mid-September launch for iTunes Radio.

Valuation range
Now, let's do some math. The table shows a range of future market-cap estimates derived from current analyst forecasts, and multiplied by a series of revenue multiples -- half, double, or even with today's premium, as tracked by Yahoo! Finance.

Worst Case 2018 Revenue Estimate
($1,763.20 million)
Average 2018 Revenue Estimate
($2,221.51 million)
Best Case 2018 Revenue Estimate
($3,131.40 million)

Worst Case Multiple
(3.75x revenue)

$6,611.25 million

$8,330.66 million

$11,742.75 million

Average Multiple
(7.5x revenue)

$13,224 million

$16,661.33 million

$23,485.50 million

Best Case Multiple
(15x revenue)

$26,448 million

$33,322.65 million

$46,971 million

Source: S&P Capital IQ.

I'll grant this is a wide range of outcomes, most of which won't come true. The bottom row represents the potential premium were Pandora to obliterate not only its Internet rivals but also its most dangerous terrestrial opponents. History and common sense says that's unlikely.

A better bet is that Pandora stock will continue to command 7.5 times sales come 2018, especially if the company delivers on Wall Street's estimate for 25% annualized revenue growth between now and then. Peer Sirius XM Holdings (NASDAQ:SIRI) still trades for 5 times sales after managing 18% annualized top-line growth over the past five years. Odds appear to favor the sort of outperformance that would result in a $15 billion or better market cap.

Now it's your turn to weigh in. Have a bear argument for Pandora stock? Let's hear it in the comments box below.

In the app economy, the company that controls this device wins
Pandora is growing because useful, niche apps have become our default interface to the computing experience. Devices that handle them portably and efficiently are the future, and Apple is working on one that could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He owned shares of Apple at the time of publication. Check out Tim's web home and portfolio holdings or connect with him on Google+Tumblr, or Twitter, where he goes by @milehighfool

The Motley Fool recommends, Apple, and Pandora Media. The Motley Fool owns shares of, Apple, and Pandora Media. 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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