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.
3 better stock picks for your portfolio
Pandora's profitability remains challenged heading into its third quarter. And with the stock trading around an all-time high, it is a risky investment today. That's why I encourage you to check out The Motley Fool's free report "3 Stocks That Will Help You Retire Rich." In it, The Motley Fool shares investment ideas and strategies that can help you build wealth for years to come. Click here to grab your free copy today.