Pandora: Expect Flat Growth With Desktop Declines

| About: Pandora Media (P)

Pandora (NYSE:P) has been using a metric called RPM, which helps measure monetization for the company. RPM stands for advertising revenue per 1000 ad supported listener hours. It's a good way of know how much money Pandora is actually making on its ads. Pandora has two different segments, mobile and desktop.

The company provided RPM for both segments. Mobile RPM saw strong growth as management has taken significant steps to invest in this area going forward. Total mobile revenue grew 112% to $73.9 million from $34.9 million in the same quarter last year, as mobile revenue growth outpaced mobile listener hour growth which grew 85% year-over-year. Due to this, mobile monetization reached a record high rate of $26.96 of total RPM.

So it seems as if Pandora is doing well by hitting record RPM on mobile, right?

Not exactly. While mobile RPM is at a record high it's still only half of the RPM that they are getting from desktops. Last October, RPM for desktop was around $61 and has declined to nearly $53. Desktop seems to be clearly where the money is at. There are several key reasons why advertisers are willing to pay more for desktop than for mobile. Smaller screens for mobile handsets actually constrains advertisers and this means that the inability to post high-impact ads will cause advertisers to pay less. The other issue is that the mobile advertising market is still fairly new and advertisers will not pay up until they know they can get a strong return.

It's a good sign that RPM for mobile is still growing, but the fact that the company is seeing a strong decline in desktop means that investors will not see as much growth as they were initially expecting. Management has already stated that for FY 2013, the RPM mix will be flat because of desktop declines and uncertainty of mobile advertising.

Guidance for Q4 has also spooked the market. Analysts were expecting revenue of $130 million and the company says that it expects revenue between $120 million to a $123 million. This is a bad sign when we add in a valuation that continues to price in significant growth.

Given that the company is valued over $1.3 billion, I imagine the stock price should decline significantly considering the fact that the company earned less than $10 million this quarter. In addition to this, Pandora is expecting losses for Q4 and FY 2013. The net loss for FY 2013 is expected to be between .09 and .12 cents per share.

While it is good to see growth in mobile, the decline in desktop is causing overall growth for the company to be flat and if this continues then expect valuation to shrink. Mobile advertising is also in its early stages so it's possible that growth will slow for advertisers until they can find out how effective it is to have ads on handsets compared to desktops. Investors should stay away from Pandora right now. The decline in desktop seems to be absorbing growth in mobile.

There is always a chance that RPM could increase to desktop levels if it turns out that mobile advertising is effective. If this were to happen, Pandora would see strong earnings growth. However, it's best to remain cautious as there is no uncertainty and Pandora's valuation is still very high.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.