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Why Pandora Media Inc. Stock Plummeted Friday

What happened

Shares of streaming music company Pandora Media (NYSE: P) were slammed on Friday, falling as much as 26.8%. The stock is down about 24.7% at the time of this writing.

The decline follows the company's third-quarter earnings release after market close on Thursday, which included worse-than-expected revenue and weak guidance for its fourth quarter.

Pandora's uninspiring outlook for its fourth quarter was probably the worst news from the report, as revenue was only slightly below the consensus analyst estimate. Guidance, however, was dismal. Management said it expected fourth-quarter revenue to be between $365 million and $380 million. This would represent a surprising year-over-year drop compared to fourth-quarter revenue of about $393 million in the year-ago quarter.

Image source: Getty Images.

Notably, as Pandora pointed out in the fourth-quarter earnings call, after adjusting for Ticketfly and ANZ revenue, as well as about $10 million of political advertising revenue recognized in the fourth quarter of 2016, the midpoint of this guidance reflects 3.3% year-over-year revenue growth. But this is still notably lower than the 9% year-over-year revenue growth in Q3 when excluding ticketing.

So what

It makes sense that investors are disappointed in Pandora's weak outlook for its fourth quarter. Not only would revenue between $365 million to $380 million mark a year-over-year slump in revenue, but it would be significantly below the consensus analyst estimate for fourth-quarter revenue of about $412 million.

Now what

To explain its weak guidance for its fourth quarter, Pandora management said it expects challenging market conditions to pressure advertising revenue. In addition, it anticipates it will "take some time" to improve monthly active user trends and to address ad-tech challenges.

"Our Q4 revenue guidance incorporates continued subscription growth offset by a year-over-year reduction in advertising revenue," management said in the third-quarter earnings call.

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Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Pandora Media. The Motley Fool has a disclosure policy.