Can Pandora Stand Up to Tech's Giants?

On Thursday, Pandora Media (NYSE: P  ) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. 

Pandora has carved out a valuable niche in the Internet radio space, having had substantial success by offering personalized music options both to paying subscribers and as a free service. But apart from the competitive pressure from satellite radio, Pandora also has to deal with big names in the technology industry trying to muscle in on its business model. Let's take an early look at what's been happening with Pandora over the past quarter and what we're likely to see in its report.

Stats on Pandora

Analyst EPS Estimate

($0.10)

Year-Ago EPS

($0.09)

Revenue Estimate

$123.83 million

Change From Year-Ago Revenue

53%

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

Will Pandora keep in contact with earnings growth this quarter?
Analysts have gotten slightly more optimistic about Pandora's earnings prospects over the past few months, keeping their estimates for the just-ended quarter unchanged but reversing initial calls for a small loss in the current fiscal year to projections for a $0.01 per share profit. The stock has reflected that optimism, rising nearly 30% since mid-February.

Pandora has built up a huge audience of listeners, with over 70 million unique monthly users listening to more than 1.3 billion hours of content during April. Yet many of those listeners don't pay a dime for the service, and with high royalty costs hurting its profitability, in February Pandora implemented 40-hour-per-month limit on mobile users, charging $0.99 for those who want unlimited access.

But Pandora has faced increasing competition lately. Last month, Sirius XM Radio (NASDAQ: SIRI  ) launched its MySXM service, offering subscribers who have online-access plans the ability to create customized radio stations based on 50 of its channels. Then just last week, Google (NASDAQ: GOOGL  ) introduced its Google All Access personalized radio service, although Google decided to skip over Pandora's key free-subscription audience by starting its service with a monthly rate of around $10.

Meanwhile, the elephant in the room is Apple (NASDAQ: AAPL  ) , which has reportedly been moving ever-closer to creating its own streaming-music service. Given the power of Apple's iTunes, a streaming service based on the data it already has on those who use its ecosystem of music listening and purchasing could have huge competitive advantages over Pandora and its other rivals. Moreover, with Google having already entered the fray, the pressure will be on Apple to respond quickly.

In Pandora's quarterly report, the key piece of information is how well the company does in converting existing free customers into paid subscribers. Unless Pandora can accelerate that process going forward, it will struggle to keep its stronghold over the Internet-radio industry while retaining any chance of becoming profitable in the near future.

Pandora has won millions of devotees among music fans but few supporters on Wall Street. The online jukebox seems to be redefining the way we consume music, but high royalty rates and competition from all corners threatens to silence the company. Learn more about the key opportunities and potential pitfalls facing the upstart radio streamer in The Motley Fool's new premium research report. All you have to do is click here now to subscribe to this invaluable investor's resource.

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