RIM is Late to the Party Once Again
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Apple (NASDAQ: AAPL) is getting back in the music game after shutting down its iTunes integrated music listening platform, Ping, last month. The company's music platform, iTunes, currently only offers the option to purchase music outright. Yet, Apple is now looking for a way of offering streaming music services. This service could make the iTunes mobile app a powerful offering for the iPhone. Such a service would rival the start-up, Spotify, which is considered the leader in the music listening app and platform sector.
Of particular interest to Apple and Google (NASDAQ: GOOG) investors, Research In Motion (NASDAQ: BBRY) recently announced plans to add a reinvigorated music service for its Blackberry 10 devices. The app will be developed by 7Digital, and offers Blackberry users over 22 million soundtracks. This new music store will have further integration with social media and recommendation capabilities. However, the company appears to continue to be a laggard in the industry, as a number of other companies besides Apple have already announced plans for a music service. As the app developer support has been weak for Blackberry, this new service should at least give current Blackberry users something to get excited about, yet the company's problem is that its user base is still in rapid decline.
Microsoft (NASDAQ: MSFT) also made an announcement earlier this month that it was moving into the music industry by offering music services integrated into its Windows 8 devices, including mobile phone, and Xbox gaming consoles. Around the same time, Facebook (NASDAQ: FB) announced plans to integrate music directly on its site. We believe there is a proven market for social listening, although Apple was not able to capitalize as evidenced by Ping. Facebook has one of the best opportunities to finally perfect this segment. Given that music streaming sites have had greater success with mobile monetization, a streaming music service by Facebook that ties into its mobile app might give the company a jumpstart in mobile monetization.
Google has had its music platform in the market for over a year, but has failed to gain real traction. After a dismal quarter for earnings, the company is looking to better utilize its leading market share in the mobile operating sector. This includes building a more robust music offering. The company recently announced a huge deal with Warner Music Group.
Despite their various attempts, RIMM cannot seem to get ahead of the competition. We see Apple's initiatives to launch a streaming service as a another blow to RIMM's already flaying business. As Apple already has a vast user base, the company could evidentially be a threat to Facebook's potential social listening platform. The downfall to Microsoft's planned music offering is its limit to Microsoft devices. Of course, Google has a leg up given the fact it owns over 50% of the mobile operating system market share with Android, but we believe that the company's Google Music service has been in the market for so long that it's difficult for any sort of reinvention.
RIMM did manage to grow its subscriber base for last quarter by 2 million to a total of 80 million thanks to emerging markets. Yet, with these new customers comes a lower average revenue per user. RIMM is expected to continue to lose North American market share as next quarter results include the intro of Apple's iPhone 5. As a result, performance going forward will be driven by emerging markets, which carries a much lower revenue per user, causing margin compression.
When considering which company to buy, it does go beyond just which music service is the best. Although Facebook might get some good traction and see more time spent on its site by users, this does not necessarily translate into revenue. As a result, we would like to see Facebook develop some growth drivers that will help the company grow over the longer-term, as the company currently trades at 200x earnings. There are obvious concerns as to whether it can grow into this valuation.
RIMM trades well below some of its top mobile phone competitors on a multiples basis, although both its trailing and forward P/E ratios are incalculable given negative earnings are in play. We remain cautious on the company given its continued decline in the mobile market, and see a takeover as the only hope for positive stock performance in the interim. Despite this, S&P recently upped its RIMM price target from $7.50 to $9.00, where the company currently trades around $7.50. As well, Wells Fargo increased its estimates for revenue from $9.57 billion to $11.16 billion in fiscal year 2013.
Meanwhile, Apple, Google and Microsoft trade in a much more reasonable P/E range between 14x and 21x earnings. We believe that Apple has some of the best growth prospects of all the companies and trades the cheapest at 14x earnings. Apple also has the highest fund interest of the five companies, with over 40 funds with at least 5% of their 2Q 13F portfolios invested in the company; see all funds owning Apple. The expected five year EPS growth is another positive vote for Apple at a 21% CAGR, compared to Google's 16% and Microsoft's 10%.
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This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Apple, Facebook, Google, and Microsoft and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Apple, Facebook, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.