Pandora (P +0.00%) opened 15% lower today, and it's easy to see why.
Forget about the better-than-expected results for its fiscal third quarter. There was too much harm done in the company's guidance, leading Stifel Nicolaus to slash its price target on online music pioneer.
What's eating Pandora?
I'm glad you asked. Let's count the ways.
1. Sequential stagnancy is never flattering
Investors may have initially cheered the 60% pop to $120 million in revenue for its latest quarter, but what's the deal with only expecting $120 million to $123 million in revenue for the current quarter?
This isn't just about falling well short of the $130 million that Wall Street was targeting for the new quarter. There is nothing sexy about flat top-line growth in an industry where seasonality isn't much of a factor.
2. Red ink again
Pandora may have come through with a small adjusted profit for the current quarter, but it sees a meaty deficit during the holiday quarter.
Yes, we're back to that again.
3. There are too many freeloaders
Just $13.7 million -- or 11% -- of Pandora's $120 million in revenue came from subscriptions.
Let's work the cruel math. Pandora is bragging about 59.2 million active users. Divide $13.7 million into 59.2 million -- and then divide by each of the three months in the period -- and the average member is generating less than $0.08 a month in subscription revenue.
Obviously that's not the rate. But the vast majority of Pandora users clearly have no intention of paying for the service, and that's the problem.
When Sirius XM (SIRI +0.00%) rolls out its Pandora-like service this month it will be to paying subscribers. Spotify has millions of premium accounts. Instead of complaining about Internet Radio Fairness Act and the fractional pennies that it has to pay for every stream, Pandora's true focus should be on growing its audience of payers.
Pandora isn't doing so hot, and that's before the inevitable onslaught of competition storms the niche.
