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Pandora's Upcoming Catalyst

This could be an important week for Pandora Media (NYSE: P  ) when it releases its monthly listening metrics for February. There hasn't been an impact on financial results from Apple's (NASDAQ: AAPL  ) launch of iTunes radio back in September, and a strong February would show that the two can coexist. There have been a few blips in what has been a steady rise in listeners and listening hours, so be ready for a possible opportunity later in the week, especially in light of potential future competition from  (NASDAQ: AMZN  ) .

Source: Company press releases and author calculations

Active listeners have been growing steadily in low single-digits over the last 14 months, but there have been a few setbacks that seem to fall into two categories. In January of 2013 and 2014, there seems to be a recurring instance of seasonality, where the number of active listeners drops, but quickly recovers in February. In fact, last year, the number of active listeners rebounded in February to a level above the prior December, fully closing the gap. Last year, in January, there was a 2% drop, this year there was a 4% drop, and professional investors are likely looking for Pandora to close the gap again this year with a number above 76.2 million active listeners in February.

Initial iTunes Radio impact
Apple launched iTunes radio on Sept. 18, 2013, which caused a brief period of volatility as Pandora subscribers tried out the service. Some decided to go solely with Pandora, while other use iTunes radio in conjunction with Pandora. In October, the number of active listeners declined by 2%, sequentially, but rebounded quickly in November, nearly to the September level.

Why February numbers are important
After a little weakness in January, February can confirm that the decline in active users was just a temporary blip, rather than a trend that will continue as competition heats up. It is possible that the additional attention brought to online radio by the iTunes launch will provide free advertising for Pandora as people try multiple services and settle on their favorite one. However, the reverse is possible as well; after a brief and mild impact from the launch, iTunes radio could gain steam. We don't know the answer, yet, but will find out when February numbers are published.  Last year, they came out on March 7, which would correspond to this Friday.

Two new big wrinkles, Amazon and iTunes expansion
According to Re/code, Amazon would like to launch a new music service that will be bundled with Amazon Prime by the end of the year, but the company isn't close to closing a deal. This is a consumer goods business, but adding Amazon into the mix doesn't get music companies improved economies of scale -- it just erodes their pricing power. There are plenty of choices available to consumers for both free and premium music services, and the major labels don't need to offer Amazon a discount to erode the share of higher-paying customers. Amazon has been willing to take a massive hit in the short term to gain share, and if it decides to pay up for content, this would be another potential powerhouse in the industry. 

iRadio down under
Apple already has licensing deals in place and appears to be expanding globally. According to The Australian, iTunes Radio launched in the country on Feb. 11, which coincidentally is the only international market (if you include New Zealand) where Pandora is active. 

Per-user valuation is more than two times WhatsApp
When Facebook purchased WhatsApp for $42 per average Active Monthly User, many people were surprised at the valuation. However, to buy Pandora today, even without paying a premium, it would cost $99 per Average Active Monthly User over the last three months. The business model is very different, as advertising is part of the mix and there are paying subscribers, but that seems to be a high hurdle if growth does indeed slow when metrics are released later this week.

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David Eller

I started contributing to the Motley Fool in 2013. I have held research positions at two investment banks and two hedge funds before trying more entrepreneurial ventures. I'm passionate about helping people find freedom in financial independence. Feel free to add comments and start a discussion. I hope to use these articles as forums to learn from you as well as share my opinion.

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