Pandora Media, Inc. Is Singing a New Tune in 2014

Shares of Pandora Media (NYSE: P  ) opened lower this morning. It wasn't the look back at 2013 that did the leading music streaming website in. Pandora capped off 2013 by producing the most profitable quarter in its history, blowing past analyst expectations. Revenue was roughly in line with expectations, proving yet again that advertisers are starting to pay more for the service's listeners.

However, like a Pandora stream that follows up your favorite song with a David Hasselhoff tune, the market just didn't like what it was hearing about the future. 

Pandora's weak guidance for 2014 and problematic performance metrics for January sent the stock that hit an all-time high last week lower. The online speedster is forecasting an adjusted profit of $0.13 a share to $0.17 a share for all of 2014 on $870 million to $890 million in revenue. Wall Street was targeting earnings of $0.19 a share with $896.3 million on the top line.

The outlook still calls for healthy growth this year, but you can't nearly quadruple in value over the previous 13 months and expect to escape unscathed if you fall short.

It's not just the disappointing forecast that's rattling the market. Pandora is generous enough to provide monthly updates on several key metrics that gauge its popularity, and its performance in January poses a few growth concerns.

Listener hours clocked in at 1.58 million last month. That's a 13% increase over January of last year, but it's flat with its showing in December. Active listeners of 73.4 million -- while a year-over-year increase of 12% -- actually declined form the record 76.2 million sets of ears it attracted in December.

Making sequential comparisons often requires a sensitivity to seasonality trends, and that does factor in to the month-to-month volatility here. A year earlier we also saw flat listener hours and a dip in active listeners between December and January, even though usage actually spiked dramatically sequentially the year before that.

At the end of the day, Pandora's share of the U.S. radio listening -- a metric that naturally takes seasonality into account -- did slip from 8.6% in December to 8.57% in January. It's not good when you're not growing as fast as the radio market that consists largely of old-school terrestrial radio. 

The arrival of Apple's iTunes Radio in September has led to greater scrutiny of Pandora's monthly metrics, and that vigilance was heightened when Pandora posted a sequential decline in active listeners a month later. However, Pandora's held up well since that initial hiccup. It has largely survived Apple's challenge. That may change given the sequential slip in users and Pandora's soft outlook, but bulls aren't necessarily out of luck here.

Pandora is no longer merely a story about usage growth. The real driver here has been its ability to milk more money out of its content by getting advertisers to pay more and encouraging more of its users to shell out money to become premium subscribers. That's clear when one considers that usage only rose 16% during the final three months of 2013, but ad revenue and subscription revenue soared 39% and 132%, respectively. The end result is a 52% spike in revenue while only serving up 16% more content.

Pandora's uninspiring guidance warrants today's dip after a spectacular run since the start of last year, but it's nothing to be alarmed about as long as it can make up slowing usage trend through improving monetization.

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