A New Player in the Internet Radio Industry

Robinson is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Apple (NASDAQ: AAPL) is a major player in the technology business. The product innovation introduced at the end of the last decade propelled the stock to trade as high as the $700's, as you probably know. However, after the release of the iPhone 5 in September of 2012, the stock slid more than $300 dollars, and has hovered around $430-$440 for much of the past few months. Apple is diversifying its products and services in an effort to capitalize higher revenues. Will this help send the stock back up?

A new competitor enters the market

The company has inaugurated a radio service through iTunes. The service will aim at taking share from Sirius XM Radio (NASDAQ: SIRI) and Pandora (NYSE: P). Apple trades with a price-to-earnings ratio of 10.4, below the 12.4 industry’s average. The company’s revenues rose 10% to $43 billion in the first three months of 2013 compared to the same period a year ago. However, due to higher costs of operations, its net income declined by almost 20% to $9.5 billion. Cash from operating activities increased by 10% to $36 billion, and its free cash flow increased by 10% to $31 billion.

The company has just announced the expansion of its share repurchase program from $10 billion to $60 billion. In addition, the board of directors hiked the dividend payment by 15% to $3.05 per share. The company should not have any issues fulfilling these obligations as its free cash flow is strong. The free cash flow increased by 10% to $31 billion for the first quarter of 2013. I am sure investors love the tune this song is playing to their growth portfolios.

Although the company is barely entering the streaming market, I believe Apple will not have any issues taking market share from other streaming companies. Since the number of iPhones and iPads sold each quarter is increasing, and the service is incorporated in the devices, the number of customers should also increase. In short, I believe the streaming business should be beneficial to Apple, and its revenues will increase. Investors should consider owning Apple in their growth-oriented portfolios.

The other competitors

Pandora will continue to be a strong competitor in the streaming business. The company trades with a negative P/E, and a forward P/E of 55. Pandora is considered expensive from the valuation point of view. Its revenues rose 55% to $126 million, but due to higher costs of operation, its net income resulted in a loss of $29 million for the three months ending in April of 2013, compared to a loss of $20 million a year ago. These metrics may not be appealing to the value-oriented investor.

Apple’s insertion to the streaming market is particularly dangerous to Pandora. The company’s revenues come from advertisements between songs, and paid-subscriptions. 

Although iRadio will not be ad-free except for iTunes Match subscribers, the company now offers a second option for customers to listen to radio. I fear that several iPhone users who previously enjoyed Pandora will migrate toward the iRadio platform. iRadio should bring revenues in the same fashion as Pandora by advertisements and paid-subscriptions to the iTunes Match feature. 

Investors who have a position in Pandora should look for changes in the number of subscribers in the coming quarters to assess the damage inflicted by the introduction of Apple to the market. I do not recommend having a long position in Pandora at this time.

The internet radio in your car

Sirius XM may fare better than Pandora, at least for now. The company trades with a P/E of 6.54, below the industry’s average of 7.4. According to its latest quarterly earnings statement, revenues rose by almost $100 million to $897 million for the last three months ending in March. Its net income rose by 14% to $124 million. Cash from operations rose from $40 million to $169 million, and free cash flow rose from $15 million to $142 million. These metrics are attractive to value-oriented investors. What’s more is that Sirius offers an interesting investment prospectus. 

I do not believe that Apple will take a significant market share from Sirius at this point. The company has partnered with major automotive manufacturers to offer an integrated radio service for a modest fee. Further, the demand for automobiles is growing stronger each day, and Sirius should benefit from a rising number of customers.

Revenues from the automobile sector should remain strong until the day Apple targets this sector by forming alliances with more automakers. Investors should remain cautious regarding Apple’s strategy to enter the car business. I believe at such point, the business model for Sirius will be in serious jeopardy and an exit strategy in a long position should be evaluated.

Wrapping it up

Apple is a company that can enter any market due to its huge cash resources. By entering the internet-radio business, Pandora is in danger. The company has negative net income despite increasing revenues, and I fear Apple will take a significant market share. I would not recommend committing to long positions at this point, and I would reevaluate whether my investment is somewhat safe if my portfolio is exposed to the company.

Sirius, on the other hand, should fare better. Its partnership with auto manufacturers has proven fruitful. Its revenues are increasing, and a constant strong demand for new autos is a plus for the company as the number of subscribers is likely to increase. Sirius should continue to provide capital appreciation to its customers.

Finally, Apple should continue to fare well. Although I have no doubts that the company will take market share from other competitors, the radio section may not increase its revenues substantially. The sales of iPhones and iPads should continue to lead its revenues. I believe that Apple’s revenues should rebound in the interim, and I believe a long position should be considered in the company.

 

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Robinson Roacho has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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