Pandora (P) is the leader in Internet radio and offers a personalized music experience based on each listener's preferences and feedback.

The company went public in June, and since then its stock has seen several ups and downs. While Pandora continued its rapid user growth over the course of the year, competition has intensified. Apart from being available online, Pandora has also launched apps for Apple's (AAPL) iPhone, Research in Motion's (RIMM) BlackBerry and other smartphones operating on Google's (GOOG) Android platform.

Our price estimate for Pandora stands at $9.48, implying a discount of a little under 10% to the market price.

See our complete analysis for Pandora

IPO launched, but stock plunged

Pandora launched an IPO in June at $16 per share. At the same time, we estimated the company's business value at around $1.8 billion based on our future expectations. Our estimates stood at a 40% discount to Pandora's IPO price. Since then, we have more or less maintained our price estimate while Pandora's stock has plunged by about 35%.

The stock has been hammered by growing concerns around competition, its business model and economic uncertainty. But the company has maintained high subscriber growth, indicating that the market believes that while the present is rosy, the future is highly uncertain.

Extensive user growth continued

Pandora reached the 100 million subscriber mark shortly after filing its IPO. We estimate that by the end of 2011, the company had close to 120 million subscribers -- a growth of 50% during the year. The number of listener hours have increased at even higher rate and reached close to 2.1 billion for just the third quarter. This implied a growth rate of more than 100% over the third quarter.

The growing popularity of smartphones has played a significant hand in this growth. In 2008 mobile access accounted for 4.6% of total listener hours. This figure reached about 60% by end of Q1 2011 and has continued to increase since then.

Serious competition emerges

In 2011 the company also saw radio competition intensifying, with Clear Channel launching its iHeartRadio platform, allowing users create customized stations as well. And as Pandora pushed into vehicle installations, it made a new enemy: Sirius XM (SIRI). Finally, Spotify's music service, in collaboration with Facebook, further intensified competition for Pandora.

Although Pandora's management sees Spotify as a complementary service, we think that due to the broader media device convergence, the two companies will compete. (See article Can Pandora & Spotify Co-Exist?)

This year will be critical for the company as it tests itself against the iHeartRadio service. It will be interesting to see to what extent this recent development will affect Pandora's growth trajectory.