Why Pandora Is Down in an Up Market

Pandora Media (NYSE: P  ) released its February user metrics on Thursday, and the stock is trading off, despite the S&P being up. On Tuesday, "Pandora's Upcoming Catalyst" discussed the notion that the Street is probably looking for a number confirming iTunes Radio is not having an impact on listener growth. Apparently, 75.2 million (Pandora's active listeners) isn't a good enough number to quell those fears. Could this be seasonal or structural, as Apple (NASDAQ: AAPL  ) and Amazon.com (NASDAQ: AMZN  ) enter the market?

Blame the weather
Pandora has seen a shift from desktop to mobile listening hours, so it is very possible that an increasing number of listening takes place in the car. Over the last 45 days, the entire east coast has been blanketed by snow, and Baltimore even saw its lowest temperature in 140 years. A decrease in the amount of driving in some of Pandora's core markets could, at least partially, be explained by the weather.

Seasonal or structural?
In January 2013, active listening hours dropped by 2% from December 2012, then accelerated by 3% in February, indicating there may be seasonality to the streaming Internet radio business. In January 2014, there was a larger seasonal drop of 4%, but this time the pickup in February wasn't enough to offset the decline. February's 3% growth is the same as last year's, but Active Monthly Listeners of 75.2 million was still below December's level of 76.2 million. This may leave investors wondering if the slower acceleration in February is seasonal or structural.

iTunes Radio threat
In September 2013, Apple launched iTunes radio, which seemed to cause a disruption in Pandora's Active Listener growth in October, which saw a 2% decline in listeners from September. Since the growth rebounded in November, most investors were willing to write it off as a temporary phenomenon. Now, that conclusion may have to be reevaluated.

Big advertisers seem happy with iTunes Radio
Apple has not released listener metrics for its service, but Ben Winkler, the chief digital officer at OMD, said in an Ad Age article that he is reaching more people on mobile devices than originally expected. OMD represents industry heavyweights, including Nissan and Pepsi, which could be a good proxy for large advertiser sentiment.

Amazon may be getting into the market
According to Re/code, Amazon has a desire to launch a new music service that will be bundled with Amazon Prime by the end of the year. However, the company isn't close to closing a deal. Amazon is reportedly trying to get sweetheart deals from labels to reduce its cost below Pandora's. This is not likely to happen because adding Amazon into the mix doesn't get music companies improved economies of scale; instead, it just erodes a label's pricing power.

Valuation is even higher than WhatsApp
Facebook
purchased WhatsApp for $42 per average monthly user, yet Pandora is priced even higher. Even without factoring in a premium, it would cost $98 per user for the month of February. Granted, Pandora's business model is very different than WhatsApp's, as advertising contributes to the company's top line and subscribers pay more than just $1 per year. If growth does indeed slow when March user metrics are released, there could be significant volatility for Pandora.

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