Pandora's Box Reveals a Nice Surprise

NEW YORK ( TheStreet) -- Pandora Media ( P) opened its box on Wednesday, showing Wall Street that it's able to grow extremely fast, while not losing money.

Pandora, which competes in the paid radio market along with Sirius XM ( SIRI) and Spotify, reported fiscal second-quarter earnings that beat analysts' estimates on both the top and bottom lines. Revenue grew 51% year-over-year to $101.3 million, and the company broke even on a per share basis. The company noted that ad revenue grew 53% year-over-year to $89.4 million, while subscription revenue rose 37% to $11.9 million.

Analysts polled by Thomson Reuters expected the Internet radio provider to lose 3 cents a share on $100.94 million in revenue.

Canaccord Genuity analyst Michael Graham upgraded shares to "buy," based on the improved outlook for the company, the potential to monetize at a better-than-expected rate, a detailed look at how mobile impacts revenue, and the potential for content costs to come down. "We believe Pandora is showing strong traction with listeners and advertisers, and believe the company has reached an important stage of critical mass and better visibility," Graham wrote in his note. He has a $16 price target on shares.

The company noted that mobile, which monetizes at a lower rate than desktop listening, contributed $59.2 million in revenue during the quarter, as more people listen to Pandora on smartphones and tablets. "Given that the integration of Pandora into automated radio ad buying platforms should be complete by year end, we believe it is only a matter of time before overall mobile monetization closes the gap with desktop, and we believe this time is approaching more quickly now," Graham noted.

Although Pandora does not directly compete with Sirius, with Sirius offering a full array of entertainment, Pandora has launched its first comedy channel, and many analysts expect the Internet radio company to eventually expand its offerings.

In addition to the strong second-quarter results, third-quarter and full-year outlook also beat Wall Street estimates. For the 2013 fiscal year, Pandora said it expects to lose between 4 cents and 8 cents a share on revenue between $425 million and $432 million. Wall Street is looking for a loss of 11 cents a share on $424.16 million in sales.

Even with shares rebounding sharply this morning, Barclays Capital analyst Anthony DiClemente notes not all is strawberries and cream with the Oakland, Calif.-based company.

DiClemente noted that ad revenue came in below Street forecasts, and mobile monetization has not yet greatly improved. He rates Pandora "underweight" with a $9 price target.

Pandora CFO Steve Cakebread also announced on Wednesday that he's leaving the company, but JPMorgan analyst Doug Anmuth does not believe this is a significant concern.

With Pandora obtaining 6.13% of the radio market at the end of July, Anmuth believes the company will continue to take market share in not only online, but mobile and advertising as well. "We recognize that very strong growth in usage hours driven by mobile will continue to weigh on profitability in the near to mid term, but in the meantime we believe that Pandora will build significant market share and that the ability to monetize mobile hours will improve over the next few years and drop down to the bottom line."

Shares of Pandora are up sharply in early Thursday trade, gaining 13.59% to $11.45.

Interested in more on Pandora? See TheStreet Ratings' report card for this stock.

-- Written by Chris Ciaccia in New York

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