Pandora's Slowing Growth: Speed-Bump Or Wall?

• Pandora’s earnings results beat expectations; however, the slowing and possibly dead growth has severely wounded the stock.
• Pandora swears by its unique service and industry-leading algorithms, but is it any special?

Pandora was defenseless as it showed analysts that its growth might be coming to an end.

According to Sean Chandler at SeekingAlpha, investors were quick to underline the lack of sequential growth in active users and listening hours; the attractive year-over-year growth figures were largely driven by growth from prior quarters. Pandora may have beat earnings and topped even its own estimates, but it is meaningless if the service shows no signs of growth.

Pandora believes that its unique radio service is unaffected by on-demand streaming services like Spotify and the company swears by its carefully articulated music algorithms, but does this mean that Pandora can secure a future in such a competitive market?

For its third quarter, Pandora generated $239.6M in revenue, an increase of 40% year-over-year and 9% sequentially. Ad revenue grew 44% year-over year, lifted by a nice 50% increase in mobile ad revenue as monetization shows improvements. These figures handily beat estimates and landed on the high side of Pandora's expectations, but there was little concern for this as growth flattened.

Investors were swift in examining the disappointing changes in active users and listening hours. Active users only grew by a tenth of a percent to 76.5m from 76.4m, and listening hours saw a slight 1% decline from 5.04b to 4.99b hours. On the brighter side, Pandora did secure some market share from terrestrial radio, as its overall US radio market share grew to 9.06% in September from 8.9% in June 2014.

CEO Brian McAndrews tried to address the blow during the conference call by stating that last year's sequential changes from the same quarters was also minimal, but last year's active users saw a decent 2.3% increase, or 1.6m users. While this may be insignificant, it is still the biggest increase since, with the exception of the holiday quarter that generally shows positive growth. On that note, it is likely that the company will show some improvement next quarter, but if it stays flat or starts rolling downhill, a lot investors will lose faith.