by Tom Taulli | February 6, 2014 2:47 pm
Pandora Media (P) is off about 11% today on the heels of its fourth-quarter report, but investors should take a breath before worrying too much about the long-term fate of Pandora stock.
For one, Pandora stock was probably due for a rest. P shares had climbed a sizzling 70% over the past six months, so a little profit taking shouldn’t come as much of a surprise.
Also, Pandora’s Q4 results were pretty solid. Revenues shot up 52% to $200.4 million, and adjusted earnings came to 11 cents per share. While the top line ended up just missing estimates for $201 million, profits beat the bar by 3 cents.
Pandora to date remains a highly popular music app. In the quarter, listener hours rose by 16% to 4.54 billion and the number of active users increased by 13% to 76 million.
To help improve its edge, Pandora has invested heavily in improving the user experience. Some of the efforts include better playlist technologies and better use of data — such as thumbs up and down — to personalize music selections. It also features smaller but convenient features such as an alarm clock and sleep timers.
Pandora stock is certainly among the main beneficiaries of the mobile megatrend; anymore, music goes hand-in-hand with smartphones. However, Pandora also has expanded its reach into other platforms, such as automobiles. Pandora’s service is now available in 9 out of the 10 best-selling passenger vehicles, spanning brands such as General Motors (GM), Toyota (TM) and Honda (HMC).
Still, Pandora stock didn’t drop for nothing.
The company’s guidance for 2014 was on the weak side, with Pandora looking at adjusted profits of 13 to 17 cents per share on revenues of $870 million to $890 million. Both came shy of Street expectations for 19 cents per share in profits on revenues of $896.3 million.
Sure, Pandora’s management might be playing conservatively, but it’s a fair thought that as Pandora’s scale increases, it’ll be tough to keep up its currently robust growth rates.
Although, the biggest problem could be the intense competition, which could finally be taking a toll. While Apple (AAPL) appears to be disappointed over iTunes Radio’s ability to spark music downloads, the service is growing members fast. Then there’s Spotify, which recently launched an ad-supported music service in the U.S., and is building out with help in part from a $250 million funding raise late last year.
There’s also a wild car in the music wars: Beats Electronics. The company, which sells popular headphones and speakers (including Beats by Dre), has launched its own music service. The company has gotten aggressive, forging a distribution agreement with AT&T (T) and taking out a big ad spend to put Ellen DeGeneres in a Super Bowl commercial. But most importantly to Pandora, Beats started up its own streaming service in late January.
For now, Pandora stock is in something of a no-man’s land. The company so far has produced results that have shown its ability to fend off competitors, but the headwinds keep growing. For a stock that has already posted such huge gains, more selling pressure easily could be in the offing.
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.
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