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Pandora Media (P): Upside Could Be Capped By Apple (AAPL)

 December 04, 2012 02:45 PM

(By Kevin Donovan) While we may live in the pop music past, our ticket to ride to get there is so 21st century – the customizable internet radio service Pandora, which reports quarterly results after the market close today.  We love the service but are hesitant to buy now and would sell on any bounce from earnings.

Shares of Pandora Media Inc. (P) have fluctuated between $7.08 and $15.25 in the last 52 weeks, hitting the low last month.  Since that nadir, the stock has rallied some 27%, but we think upside from current levels is limited, largely because an elephant is about to enter the room.  Reports that Apple (AAPL), already a colossus in music retailing with its iTunes business, is close to launching its own free music streaming radio service is likely to keep a lid on Pandora's share price, in our view.

[Related -Fusion-IO, Inc. (FIO): Can Fusion-IO Q2 Results Cheer Street?]

Apple already has relationships with the recorded music world that could make it a formidable competitor, Pandora's comments on competitive threats will be closely watched today, as will any color on the company's biggest cost – payment royalty owners.

Analysts forecast Pandora earned $0.01 per share in the quarter ending November 30 on revenue of $117 million versus year-ago results of $0.02 and $75 million. As always, though, it's the future that counts most, and investors will be tuned in to what Pandora has to say about it.  Latest analysts' estimates peg revenue at $429 million in the fiscal year ending in January, growing to $615 million in fiscal 2014, growth of 43%.  Earnings per share are currently forecast to reach $0.07 in fiscal 2014.  The range of estimates is wide, with a high forecast of $0.25 and a low of -$0.07.

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The big disparity in outlooks stems from a simple question: Does Pandora's business model work?

The company makes money two ways – through advertisements that occasionally interrupt the streaming music and a subscription fee that lets listeners enjoy commercial-free entertainment.  Now, there's no doubt Pandora has plenty of listeners.  The latest estimates put Pandora's registered users at about 150 million, many of them using smart phones to access their "radio stations."  And smart phone penetration is far from over worldwide.  So, market growth potential is there.  How much Pandora can take is the unknown.

Though, we intend to stay entertained by our personalized mix of British Invasion, The Byrds and Sixties Oldies on Pandora, we're reluctant to buy shares until the competitive landscape becomes clear.

Pandora Media, Inc. provides an Internet radio services in the United States. The company allows listeners to create up to 100 personalized stations to access unlimited hours of free music and comedy, as well as offers a paid subscription service to listeners.  It is also involved in the sale of displays, audio advertising, and video advertising products to advertisers for delivery on computer, mobile, and other connected device platforms.  Pandora Media was founded in 2000 and is headquartered in Oakland, Calif.



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