iRadio Set and Ready?

Tyler 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) had a rough start to June, which was highlighted by losing a major lawsuit against Samsung. This lawsuit could lead to the ban of importing Apple's iPhone 3S and iPhone 4S, among other products. Will there momentum return after the announcement of their iRadio being one step closer to release?

The story

It is being said that Apple has signed a deal with Sony (NYSE: SNE) Music. Bloomberg is reporting that this was the "final record-company holdout needed for the iPhone maker’s planned online radio service." This service has been unofficially dubbed iRadio. iRadio will pull songs for its customized stations, made by its users, from its iTunes library. Apple has fallen 18% so far this year, and this announcement didn't really stop the slide.

The system will compete with Pandora (NYSE: P) for business, which has risen 56% so far this year, and over 2% upon this news. Amazingly, Pandora has seen revenues grow 2,484% since 2009, while Apple has "only" risen 2,724% in the past decade. So, what exactly could Apple's partnership mean to the company?

Music's impact

In 2012, Apple's iTunes accounted for less than 5% of Apple's total revenues. However, with the success of Pandora and other competitors, Apple has no reason that it shouldn't be able to match that figure with this new iRadio service. If it could, it would make up close to 10% of Apple's total revenue. That would be significant. In fact, if it had generated 5% of Apple's revenue in 2012, the company would have generated an additional $7+ billion, meaning the company would have generated $15 billion through music alone. That is a significant boost for any company.


Apple: Apple's stock still shows a very cheap valuation. It's FCF yield is 10.7% and it shows an earnings yield of 9.5%.  The company's P/E is also very solid at 10.5. Apple is a company with more available cash than any of these other companies, and, for that matter, more than any American based company. Despite increasing its dividends to a 2.5% dividend yield, the company plans to release $100 billion to its shareholders by 2015. I would expect a large portion of that to be in dividends. 

Sony: It certainly doesn't have the dividend yield that Apple does, but its yield is a solid 1.42%. Its P/E is much higher than some investors would like, sitting at 63.4. Sony also shows an earnings yield of 1.6%, which doesn't encourage bargain-hunting investors to buy too much of the stock at this point. 

Pandora: We already discussed the amazing growth of revenues from this company, but its valuation aren't the most attractive feature of the company. It's earnings, free cash flow, and dividends either don't exist, or are in the negative. One good thing for the company is its gross margin levels. From 2009-2012 the company grew its gross margins annually, topping out at 91.7%. As would be expected, with a company that is this young, its capital expenditures have increased for the past few years.

If someone looks strictly at metrics, Apple is the best valued company of these three. Growth investors would probably be more interested in Sony or Pandora, considering their opportunities. The chart below shows just how well (or poorly) these companies have performed in the past year. 

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SNE data by YCharts

The Foolish conclusion

Apple and Sony's recent partnership could bode well for both companies. Not that Apple needs a new source of revenue, but this new service might help keep the company in charge of the music industry. Pandora has done well in this area, but will face stiff competition moving forward. These companies differ greatly in the opportunities that they offer. Some may end up being dividend kings (Apple), while some provide opportunity for significant growth.

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Tyler Wofford 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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