One Bad Month Reveals Pandora's Weaknesses

Cheerful teen dancing and moving along with music on her smart phone and headphones

Sometimes the market is too smart for a company's own good. Shares of Pandora (P) slipped after posting quarterly results a few days ago.

Everything seemed upbeat with the report itself. The leading streaming radio provider beat Wall Street's profit expectations for the third quarter in a row. Revenue climbed at a healthy 43 percent clip, fueled by a 29 percent year-over-year spike in usage and even better growth in advertising and subscription revenue.

A lot of companies reporting this earnings season are getting tripped up by the guidance that they are providing, but that wasn't the case with Pandora. It increased its adjusted revenue and earnings projections for all of 2014.

But Everything Was Going So Well

Most stocks would climb nicely if the past was solid and the future is rosier, but Pandora buckled because a few key metrics that it used to report on a monthly basis went the wrong way between May and June.

Pandora closed out the June quarter with 76.4 million active listeners, but that was less than the 77 million active listeners it was claiming to serve at the end of May.

It served up a whopping 5.04 billion hours of content during the quarter, but if we back out the 1.7 billion hours that it delivered in April and the 1.73 billion that it pushed out in May, we are left with 1.61 billion hours for June. There is an extra day in May, but that's not enough to explain the sequential slip. In fact, because of May's extra day relative to both April and June, we're talking about back-to-back months of declines in usage on a daily basis.

The third and final stat that Pandora until recently put out on a monthly basis -- its shares of the total U.S. radio listening market -- has gone from 9.28 percent in April to 9.13 percent in May to 8.9 percent in June. This final metric is important because it adjusts for any seasonality in consumption. Unfortunately for Pandora, it also shows back-to-back months of sequential declines.

Something to Hide?

Pandora's popularity hasn't always gone up in a straight line, but month-to-month declines have been rare since it started publishing the three monthly metrics. It should make investors curious -- if not outright suspicious -- that Pandora recently decided that it will no longer be providing monthly metrics.

We won't know how any of these measuring sticks held up in July. We probably won't hear anything for another three months when Pandora offers up its next quarterly report. If we see continuing declines, it will be hard to escape concerns that Pandora's popularity peaked in April.

Bulls will argue that Pandora boosting its revenue and earnings guidance implies otherwise, but that's been the handiwork of the company getting better at milking more money out of its advertisers and talking more of its freeloading majority into paying up for ad-free streams through subscriptions.

This is becoming a more competitive market. It's probably not a surprise to see that Pandora began having hiccups on the way up since Apple (AAPL) introduced the similar iTunes Radio last September.

It's not just Apple and the ad-supported streaming service that's being used by tens of millions of iPhone, iPad and iPod owners. Other tech giants have started acquiring smaller digital music services.

Keep an Ear to the Ground

Pandora doesn't have to gain market share to win, of course. Smartphone penetration rates continue to improve in the U.S., and Pandora could try to become an international player the way that on-demand darling Spotify has done. However, with blue chip tech behemoths having an interest in streaming and new digital music apps hitting the market on a regular basis, Pandora is going to have a lot to prove.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Apple and Pandora Media. The Motley Fool owns shares of Apple and Pandora Media. Try any of our newsletter services free for 30 days.