An eyebrow-raising estimate of online radio company Pandora’s valuation was released Wednesday by the folks at Trefis.
For those unfamiliar with Trefis, the company uses computer models and nifty visualizations to forecast and break down a company’s stock price or market cap. That’s tricky to do for some public companies, but for private companies like Pandora, the task is even harder. (Pandora is preparing for an IPO.)
The $984 million valuation of Pandora, therefore, should be taken with a grain of salt. Yet some of Trefis’ arguments are convincing. Listener hours have been rapidly increasing for both mobile and online listeners, and the astronomical growth of smartphones should help continue to expand Pandora’s usage.
Trefis estimates that online ads generate just over a penny of revenue for Pandora for each hour a listener tunes in, and mobile ads are worth just over three cents. That works out to about $207 million in ad revenue a year. Subscriptions add just $29 million, and the company has about $35 million in cash.
Royalties are expected to climb substantially, but increased mobile listener hours and deals with automakers should help the company overcome that, Trefis said.
Still, how do you get to $1 billion with those numbers?
Oh, right, ad targeting.
It’s highly controversial — Pandora was recently subpoenaed as part of a government probe of what data smartphone applications collect about us — but it sure is effective. Trefis noted that Pandora is extremely valuable to advertisers because it “can precisely tell the audience size at any given time. It allows advertisers to reach individual listeners based on their age, gender, zip code and music preference.”
Spooky? Perhaps. Lucrative? Definitely. -David