Last Thursday, Pandora (P) announced revenue that was roughly in-line with expectations and non-GAAP EPS that was a small beat. Neither was enough to keep the stock positive, as it fell over 15% in intraday trading on Friday.
At the same time, neither revenue nor EPS are really why the stock is falling or why the stock was downgraded, either.
The company reported revenues of $239.6 million, a hair above expectations of $238.5 million. Guidance for $273-$278 million in revenues for the fourth quarter and EPS of 17-19 cents were both above expectations as well, with full year revenue and EPS guidance well above expectations as well.
Breaking that revenue into different sources, each seemed solid. Subscription revenues were 4% over expectations at $45.3 million. Advertising revenues were in-line at $194.3 million. Expenses were fine as well: content acquisition fell to $111.3 million, but marketing and sales was above expectations, $72.3 million versus expectations of $66.1 million. However, higher marketing and sales costs reflect an aggressive push to expand, and is not necessarily a bad thing for a growth stock.
Additionally, expenses are not a major issue with Pandora, whose strong growth (revenues rose 42% year-over-year) is the real impetus behind the bull case. The real focus is on how much and how fast the company can grow itself.
Considering Growth
To understand Pandora’s growth potential, we need to look not only at its revenue growth but the business size as well. Pandora sells subscriptions and advertising, so it needs more listeners to sell both ads and subs. Revenues have been growing at a similar rate for several quarters now, in the 40%-50% range, but many analysts are hoping that the company can grow even further so that its scale renders its high costs an irrelevant concern.
One way to grow its revenues is to convince more people to buy ads on Pandora, which is why the company’s advertising revenue growth (44% growth year-over-year) is a major focus for investors. But growth of advertising revenue not only relies on the willingness of people to buy ads on the platform—it also depends on people listening on the platform. This is why a second growth driver that is non-financial is the real story here: total listener hours.
Pandora used to release this information monthly, but this year began to give this information quarterly, so its impact on the stock is much rarer and possibly much deeper. This quarter, total listener hours grew to 4.99 billion and active listeners grew to 76.5 million. The active listener growth is extremely moderate: just 5.2% year-over-year, and 0.1% quarter-over-quarter. Total listener hours are slightly better—up 25% year-over-year, and 1% quarter-over-quarter. Still, sequential growth of 1% and 0.1% is a distressing sign of maturing growth for the Pandora platform.
The Impact on Analysts’ Models
Lower listener growth means less inventory to sell to advertisers, limiting Pandora’s future growth potential. And this is why the stock is trading down, even with strong revenue and earnings numbers for the last quarter.
This is especially worrying as a number of Wall Street analysts have projected a significantly higher growth trend, which in turn caused their assumptions for future revenue to be much higher than they are now, as the reality of more modest user growth replaces the models of much higher user growth.
The story of Pandora’s plummeting price is a story of bad models and a new reality replacing the old expectations, but it’s important to note that these metrics have nothing to do with the financial data from the company; they depend on company-specific metrics about the company’s unique business model.
The lesson is clear. Analysts who knew and understand Pandora’s business beyond its metrics easily outperformed those who bet on the stock based solely on financials, and they will continue to do so for this and all other stocks in the market.