Please ensure Javascript is enabled for purposes of website accessibility

3 Things That Can Go Wrong for Pandora on Wednesday

By Rick Munarriz - Feb 20, 2018 at 10:07AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The digital music pioneer reports financial results this week, and it probably won't be pretty.

The audience is gradually thinning at Pandora (P), and its once-hungry potential suitor seems to be settling for a tapas-sized minority stake in the streaming radio pioneer. Pandora's stock is languishing, and that brings us to Wednesday, when it will report its fourth-quarter results shortly after the market close.

Pandora will have a lot to prove this week. The stock has been trading exclusively in the single digits since May of last year, and the shares would have to nearly double at this point to get back into the double digits. A strong financial report can obviously help, but there are also a lot of things that can go wrong. Let's go over some of the things that may keep Pandora in check come Wednesday afternoon.

Three performers on stage during a Pandora-sponsored concert.

Image source: Pandora.

1. Quarterly results can disappoint

Analysts aren't holding out for much this time. They see fourth-quarter revenue declining 4% to $376.4 million with its deficit narrowing from $0.13 to $0.08 a share. Pandora has managed to post a narrower loss than Wall Street pros were targeting in each of the past four quarters, but this doesn't mean that it has perfected the art of overcoming the low bar of expectations.

Pandora announced three weeks ago that it would be eliminating 5% of its workforce. It plans to move some jobs out of Oakland to Atlanta in a cost-cutting move, and even though it plans to invest some of the $45 million of annual savings on broadening its nonmusic content and expanding its marketing efforts, it's still a problematic development. Would Pandora put its workforce through morale-cutting displacements if it felt that revenue was growing and it was getting closer to profitability? If Pandora fails to surpass market expectations this week, it will be easy to point to the recent layoffs as a warning sign. 

2. Usage and monetization trends can deteriorate

Pandora took a hit last time out. The shares plunged 25% the day after posting its poorly received third-quarter results. It may have landed ahead of expectations on the bottom line, but revenue clocked in weaker than analysts were forecasting, and guidance was a disaster.

A lot of the malaise has already been discounted. The stock is trading 30% lower than it was the day it would go on to announce its third-quarter numbers. However, the stock can always crack through the floor if some of its other metrics continue to disappoint. 

Will active listeners continue to contract from the 73.7 million it was serving at the end of September? Usage is slipping -- falling from 5.4 billion during the third quarter of 2016 to 5.15 billion a year later. Ad revenue was a silver lining in the past, but it rose a mere 1% as slightly higher rates was barely enough to cover the fewer ad blocks. It will likely be negative this time around, especially since Pandora is facing the headwinds of the $10 million surge in political ads it took in during the fourth quarter of last year.

3. Premium subscriptions may not be enough

Pandora's best hope at turning things around right now is getting more of its subscribers to start paying for access. The 5.19 million members currently paying for access is 29% ahead of where the tally was a year earlier. We still have 93% of Pandora's audience as ad-tolerating freeloaders, but premium subscription is the best way to appeal to investors clamoring for Spotify to IPO.

Keep an eye on sequential growth in premium subscriptions, especially with the rollout last year of the Spotify-esque Pandora Premium that had topped a million paying users by the end of September. If Pandora begins to lose momentum on this front, it could also rough up the stock.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Pandora Media, Inc. Stock Quote
Pandora Media, Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.