Back in June, Internet radio operator Pandora (NYSE:P) came public. While it saw a 9% first-day gain, the stock has turned out to be highly volatile, ranging in price from $9.15 to $26.
And there seems to be no end to the roller coaster. In today’s trading, Pandora’s stock is off by a painful 24% to $10.90.
No surprise there, really, given the company’s quarterly report was a huge disappointment. Revenues came in at $81.3 million, which was well -below the $83 million Wall Street estimate.
The guidance was also terrible. Pandora expects its fiscal first-quarter revenues to be between $72 million to $75 million, with a loss of 18 cents to 21 cents per share. The consensus was for $86.4 million in revenue and a 2 cent loss.
OK, so what can investors learn from this implosion — especially when it comes to social stocks? Here are some takeaways:
Dangers of Earnings Reports
Buying a social stock a few days ahead of an earnings report can be a dicey game. True, it can work out if the company reports a positive surprise. An example is the recent earnings report of LinkedIn (NYSE:LNKD).
But social media is still in the early stages — which makes it tough to predict things. Even top analysts have difficulties. Consider that a day before Pandora’s earnings, Stifel Nicolaus analyst Jordan Rohan came out with a bullish report. He bumped up his rating from neutral to buy, and then put a $18 price target on the stock.
Competition Is Everywhere
Hot industries will always attract fierce rivals. It’s a natural part of capitalism.
And social media is no exception. In Pandora’s case, it must deal with many competitors like Spotify, MOG, iHeartRadio, Slacker, Rdio, Sirius XML Radio (NASDAQ:SIRI), Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOG).
The result is it gets more expensive to attract customers. In the latest quarter, Pandora hiked marketing expenses by 46% to $21 million.
Mobile Is a Problem
Pandora is certainly benefiting from the mobile revolution. In 2011, revenues from this category quadrupled to $100 million. This makes it the No. 2 player behind Google in the mobile advertising market.
But there’s a problem: It’s not easy to monetize mobile. For example, Pandora gets $60 to $70 per 1,000 listening hours on the desktop, but only about $20 on mobile.
Over time, the rates are likely to increase. But it could mean lagging revenue growth for a year or more.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.