A year ago, Pandora (NYSE:P) was one of the first social operators to come public. The offering price was $16, and the stock jumped about 9% on its first day of trading. But since then, investors have seen a big plunge, with the stock now at $10.80. Why the did this happen? And what can we expect going forward? Let’s take a look:
Pandora is a pioneer in Internet radio — and has made a successful transition to mobile. While growth has decelerated, it’s still strong. In the latest quarter, revenues came to $80.8 million, up 58% from the year-earlier quarter.
But according to Pandora’s vice president of mobile advertising sales, Brian Colbert, it looks like mobile has been a factor in the trail off. All in all, advertising contracts have not kept pace with the substantial growth in traffic. Of course, mobile advertising is still in the nascent stages, and performance metrics are still evolving.
Yet Pandora has a big advantage: Because its service is audio, users can’t skip the ads! But they aren’t really intrusive, either. If anything, the Pandora experience is really no different from traditional radio, which actually has more ads.
So as mobile advertising matures — which it should over the next few years — Pandora could see an acceleration in revenues. Consider that the company already has a majority of the top digital advertisers in the U.S.
Still, Pandora’s future may be cloudy. The online music market is fiercely competitive and should benefit from large amounts of venture capital flowing to it. There may also be new models, as seen with Spotify, which has been able to integrate into the Facebook (NASDAQ:FB) platform to create a powerhouse.
At the same time, Internet giants are also getting into the game. One notable entrant is Amazon (NASDAQ:AMZN), which recently launched its Cloud Player service for the iPhone.
But perhaps the most immediate threat is a new operator called Songza. Over the past 10 days, it has attracted 1.15 million downloads from the Apple (NASDAQ:AAPL) app store. Songza has playlists that are based on what you’re doing — say, working out at the gym — or even for the time of the day.
So, if the service catches fire like Instagram, it could be a huge problem for Pandora, which doesn’t have a huge market cap and cash on hand to effectively take out a fast-growing threat.
That means investors should be cautious. While Pandora has a strong brand and a promising business model, it will probably come under pressure from rivals. That’s natural fate for consumer products — and it could bring lost market share and momentum.
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 “The Complete M&A Handbook”, “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.