2 Things to Watch Ahead of Pandora's Earnings Next Week

Shares of Pandora (NYSE: P  ) popped 7% on Friday after analysts at J.P. Morgan raised the stock's price target to $35 from $25, ahead of the company's earnings next week. The stock ended the week trading near an all-time high of around $31 a share. With Pandora set to report its third-quarter earnings after the bell on Thursday, let's take a closer look at two things investors should watch for when the company reports next week.

Higher engagement = better returns
Pandora has proved resilient to increased competition in the streaming music space, even as tech heavyweight Apple (NASDAQ: AAPL  ) launched its iTunes Radio last month. In fact, Pandora's market share increased more than 8% in October, despite an impressive debut for Apple's iTunes Radio. About 11 million listeners tuned in to Apple's rival service during its first weekend on the market. Apple says it now has 20 million listeners on iTunes Radio, but that's still far fewer than Pandora at more than 70 million active users today.

However, since advertising is Pandora's bread and butter, a more crucial number to consider is the amount of time each user spends on the service. For iTunes Radio, that number is about 9.5 minutes per day, according to analysts at B. Riley & Co., whereas Pandora users tune-in an average of 38.5 minutes each day.

This is important, because investors will want to keep an eye on Pandora's listener hours relative to the prior quarter, when the company reports its third-quarter results on Thursday. For its second quarter of fiscal 2014, Pandora reported total listener hours of 3.88 billion -- representing an 18% year-over-year spike in engagement. The longer users are listening to Pandora, the more cash advertisers would be willing to spend on the platform.

Radio market share and cost management
Looking to its third quarter, investors will also want to keep an eye on Pandora's share of U.S. radio listening. With major competition in the space including Apple and Sirius XM Radio (NASDAQ: SIRI  ) , shareholders will want to see Pandora growing its market share on a consistent basis. The Oakland, Calif.-based company increased its market share more than 6% in Q2 and last month said its share of U.S. radio listening grew to 8.06%.

Shareholders will also want to watch how Pandora controlled costs in its third quarter. The Internet radio streaming service is expected to break even this quarter, according to analyst estimates. However, profitability could get crimped if Pandora isn't able to justify its costs with increased revenue growth in Q3. To compete with deep-pocketed rivals, such as Apple, Pandora needs to spend more on marketing and content. However, investors also want to know that the company is capable of generating ample cash from ads to help offset those costs.

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  • Report this Comment On November 17, 2013, at 1:26 PM, zukerman wrote:

    Why is it that so many fixate on that that isn't important when it comes to Pandora's numbers, when the only one to watch is scalability. Simple math will bring you to the calculation that shows they (may) break even, but will never grow revenue fast enough to afford content. Does this author know how much Sirius' contract for baseball alone is? Pandora has problems on more than one front. On the one hand they need more revenue from ads, however they have maximized those to the point of revolt from listeners. Their sub count is increasing @3.95/mo. but doesn't cover costs. In order to raise their monthly price they need to improve what they offer. Apple is seen as that 800lb gorilla in the room, and immediately everyone thought they had only one purpose in mind when they repackaged their iTunes model. Maybe they were attempting to keep the share they had with all the competition and not necessarily trying to kill all who compete. Pandora's service is a great one as proven by their followers, but you can't paint everyone with the same paintbrush and say what they offer will satisfy the masses. Instead of parsing why Amazon is trading around $300, you should be asking yourself why Walmart isn't.

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