Has Pandora Beaten Apple and Sirius XM for Good?

Pandora Media (NYSE: P  ) will release its quarterly report on Thursday, and investors are convinced that the music streaming company will continue to enjoy lightning-fast growth rates well into the future. Even as Apple (NASDAQ: AAPL  ) and its iTunes Radio join Sirius XM (NASDAQ: SIRI  ) and other competitors in the Internet music space, Pandora continues to defy skeptics who seemed convinced that the company's days were numbered.

For more than a year after its 2011 IPO, Pandora convinced cynical investors that it had gone public at exactly the right time, as its shares slowly ground downward to lose half their value. Through quarter after quarter of unprofitable results, many believed that existing offerings from Sirius XM and the long-anticipated competition of Apple would eventually pound Pandora into the ground before it became profitable even on an adjusted basis. Yet now, Pandora seems poised to fend off competitors Apple and Sirius and continue on its upward path. Let's take an early look at what's been happening with Pandora Media over the past quarter and what we're likely to see in its report.

Stats on Pandora Media

Analyst EPS Estimate

$0.06

Change From Year-Ago EPS

20%

Revenue Estimate

$174.76 million

Change From Year-Ago Revenue

46%

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance.

Can Pandora keep coming in loud and clear?
In recent months, analysts have reined in their views on Pandora earnings, cutting their October-quarter estimates by $0.02 per share and their full-year fiscal 2015 projections by more than 20%. The stock, though, has just kept vaulting higher, rising 46% since mid-August.

Pandora came into the current quarter on a negative note, with shares plunging after its July-quarter earnings report. Even though revenue grew 58% on an adjusted basis, earnings topped expectations. But dour guidance for the October quarter made investors question whether Pandora would be able to answer the competitive call and keep growing fast enough to justify its valuation.

But the big moment for Pandora during the quarter was the release of Apple's iTunes Radio, which Pandora shareholders had dreaded for more than a year. Given the extent of the iTunes library and Apple's lower price point for commercial-free listening, Pandora investors have to be concerned that despite its huge first-mover advantage in gathering tens of millions of users, it could quickly lose its edge. Yet initial indications suggest that users like Pandora's music-selection algorithms better, with a long history of analytical expertise backing its choices. Moreover, with Pandora available on a wider array of devices, it maintains a reach beyond Apple's current ecosystem.

Moreover, early usage figures suggest that Pandora is holding on to its customers pretty well. Late last month, Apple said that 20 million users streamed more than 1 billion songs in the service's first five weeks. Yet with Pandora delivering almost 1.5 billion hours of music to its subscribers in October, iTunes Radio hasn't ramped up to anything close to Pandora's volume at this point. A drop in Pandora's unique-listener count is a bit troublesome, but it's too early to tell whether it will become a larger problem.

In the Pandora earnings report, look beyond the headline numbers to drill down on a couple of key metrics. First, look to see how many of Pandora's users become paid subscribers, as monetization will become an increasingly important key to Pandora's future success. Also, remember to look at the cost side of the equation to make sure that the company isn't paying too much to keep its customers happy. Problems on either front could jeopardize the early success that Pandora has had against both Apple and Sirius XM.

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Read/Post Comments (9) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 19, 2013, at 12:38 PM, jdmeck wrote:

    Apple is all about choices. I'm sure they would not mind beating Pandora but I think everyone else cares more than Apple.

  • Report this Comment On November 19, 2013, at 1:46 PM, 67vair wrote:

    Pandora= no profit

  • Report this Comment On November 19, 2013, at 3:01 PM, JamesRobertDobbs wrote:

    Pandora may have beaten Sirius if Pandora was in the satellite radio space, and had 25 million paying subscribers, as Sirius does.

    But unfortunately, Pandora is in the Internet radio space along with many other competitors, including Apple which only needs to throw a few million at their offering to eat Pandora's lunch. Oh, and Pandora has less than 3 million paying subscribers.

    Nice try.

  • Report this Comment On November 19, 2013, at 4:48 PM, TheeShawn wrote:

    I joined Pandora a couple years ago but haven't used it since then, I wonder if I'm still counted as an actual user?

    I also wonder how many others join then never end up actually using it consistently but still get counted as users because cancelling a free service isn't a priority?

    I just don't use it but haven't cancelled because it was free so I didn't see the point. Because of this I'm a little less trusting of their numbers than most I guess.

  • Report this Comment On November 19, 2013, at 6:03 PM, cassman12 wrote:

    Pandora was great for a few years, but I never paid for it. I did buy some songs I first heard on Pandora, but I purchased those from i-Tunes. Now I listen to i-radio and like that there are far less and less annoying ads.

    Just saying.

  • Report this Comment On November 19, 2013, at 7:32 PM, BillFromNY wrote:

    I think that there is room for both Pandora and Sirius. Their programming has little overlap. Pandora is a jukebox station, and is very good at what it does. It just feeds the user song after song with the selections tailored to what the user wants to hear.

    Sirius, in addition to music, has news, sports, talk, comedy, religion. And even most of the music channels on Sirius use at times well-known DJs, hosts, guest hosts, guests.

    But Sirius costs $15.00 a year while Pandora is free with commercials and a few bucks without them. Sirius subscribers who like Pandora won't have any trouble adding Pandora since it's free.

    Pandora's biggest problem is that the next quarter it shows a profit will be the first quarter that it has shown a profit. They have to start making money or their business model will continue to be questioned.

  • Report this Comment On November 19, 2013, at 7:33 PM, BillFromNY wrote:

    Uh, make that $15.00 bucks a year. Wish they had an edit function.

  • Report this Comment On November 19, 2013, at 7:33 PM, BillFromNY wrote:

    Uh, make that $15.00 a month. Wish I wasn't so inept.

  • Report this Comment On November 20, 2013, at 5:04 PM, BillFromNY wrote:

    The first time that I tried out iTunes radio on iTunes I immediately noticed that, after a song had finished, it was added to the list of other selections played, and all had the little "Buy Me" button next to them labeled with the familiar 0.99 or 1.29.

    So apparently one goal of iTunes radio is to help sell yet more billions of songs on iTunes.

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