Spooked Momentum Investors Punish Pandora

Despite yesterday’s FQ3 earnings statement indicating that Pandora beat Wall Street projections and that it has abundant long-term growth opportunities, Pandora’s stock price fell 11.3% since yesterday to $10.51. This is likely because Pandora lowered its FQ4 guidance to a loss ($0.03) in earnings per share, worse than its $0.02 EPS for last quarter and Wall Street’s ($0.02) guidance for next quarter. Investors see Pandora as a momentum story, betting on it gradually but steadily growing towards significant profitability. The slightly grim guidance, due to increased investments which will go towards hiring more sales people, may have spooked some investors with a distaste for any signs of slowing momentum.

Overall, FQ3 earnings looked good with $75 million in revenue compared to analyst estimates of $71M. Pandora managed a Non-GAAP EPS of $0.02, above the ($0.01) street consensus.

It also registered 2.1 billion total listening hours, up 104% year over year. 70% of listening hours were on mobile and its monthly active user count grew 67% Y/Y to 40M. Installments in cars represent a large opportunity to grow its share of total US radio listening from the 4%+ it currently has. The company said competition from Spotify and other streaming on demand services has not been an issue.

For FQ4, Pandora’s guidance of $82M in revenues matches the street’s. The stock price dropped because EPS guidance was worse than last quarter or the street’s estimates.

The lowered EPS is in part due to Pandora investing in building local sales teams. It has 4+% of US radio listening hours but only 2% of radio advertising, and that gap represents an opportunity. It sees big growth potential in absorbing local advertising dollars as it gains critical mass in more markets. To capitalize, though, it has to spend now on salespeople to attract local advertisers.

Pandora will need to recruit sales talent that can perform but doesn’t cost too much if it wants to shore up momentum and make itself look like a safer bet to investors. It will also need to convince company insiders not to take their first chance to exit when its stock lockup expires in a couple of weeks.