Pandora’s (P) big run hit a wall today. Pandora stock is off more than 12% to just over $19 — although the return for 2013 is still a sizzling 107% and the company did post a strong second quarter.
The numbers: Revenues surged by 58% to $162 million, while adjusted earnings came to 4 cents per share. The Street was only looking for revenues of $156 million and profits of 2 cents a share.
Still, investors were concerned about the company’s weak guidance … and are probably worried about some longer-term issues for the company as well, such as the emerging competition.
In the third quarter, Pandora is looking at generating adjusted earnings of 3 cents to 6 cents, which is below the consensus estimate of 8 cents. And for the full year, Pandora thinks it will earn between 0 cents and 5 cents per share, while analysts were ready for the highest end of that range.
Then again, Pandora is investing heavily in its mobile platform, which is certainly a smart thing to do. Mobile is the big growth opportunity for the company, and it has continued to get traction in the space. In the latest quarter, the mobile business saw a 92% spike in revenues to $116 million.
It also helps that Pandora has ramped up its salesforce, with a focus on providing local ads that allow for better targeting.
Despite all this, the company faces some big issues, including high licensing costs that compress margins. In Q2, content costs came to a hefty 52% of overall revenues. And perhaps the biggest problem is competition. The market is already crowded with players like Google (GOOG), iHeartRadio, Rdio, and Spotify. Even Beats has plans to enter the fray.
Plus, the most dangerous is likely to be Apple (AAPL). The company is said to be launching its streaming service in September and it will likely be a direct hit on Pandora. And Apple will have some huge advantages. After all, the company can leverage its massive iTunes database, other features like Siri and its massive marketing resources.
In light of this, investors may want to be careful with Pandora stock. If Apple’s rival service gets momentum, it could be a nightmare for the company.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
