Apple, Inc. (AAPL): Will Apple Kill Pandora's 185% Rally In 2013?

Any time an 800-pound gorilla moves into the neighborhood current residents have reason to be worried. And that is exactly what is happening with Apple, Inc. (AAPL) and Pandora (P) right now.

Apple has been making headlines lately with the release of its new iPhone and operating system iOS7. But what is turning out to be one of the most interesting components of the release, the iOS7 comes embedded with Apple's new streaming radio service called iTunes Radio. Although iTunes Radio isn't dominating the headlines like the new iPhone 5C, the service is quickly making a big impact on the market and represents a huge threat to Pandora.

At the very top, iTunes Radio offers more than 25 million songs compared to just 1 million for Pandora. That is a huge difference that makes Pandora look like a little kid trying to play with the big boys.

Pandora is also in trouble because half of its 72 million users already use the iPhone, which gives its listeners instant access to a fierce competitor with a much bigger inventory of songs to choose from.

And with hundreds of millions of iPhone users all across the world, Apple has a direct line to an entire new market that Pandora otherwise has little access to.

There may be room for 2 big players in the streaming radio space, but even if that's true, Apple is going to pressure industry margins. That's because streaming radio service providers simply act as distributors and don't control any original content. That makes reach, distribution and margin a simple matter of scale, where the biggest player on the Street can afford lower margins and loss leaders in order to starve smaller players out of profitability.

But it's clear the market doesn't care. Or isn't paying attention. Because Pandora is up 185% in 2013 and trading deep into an all-time high. But those gains aren't being driven by earnings, because Pandora is expected to lose 16 cents this year. 2014 doesn't look much better, when Pandora is supposed to earn a grand total of 6 ! cents.

With shares just shy of $27, that has Pandora trading with a forward P/E of 450x. For comparison sake, it Apple had that same valuation, shares would be trading at $18,000.

 

The Takeaway

Any time the biggest and baddest kid on the Street moves onto your block it's time to get nervous. And that's exactly what Apple is going, making a bold move into Pandora's turf with its entrance into the streaming radio market. But while this huge threat has emerged, Pandora is up 185% on the year and continues to move deeper into an all-time high. That makes Pandora at risk for both short and long-term losses as the market contemplates this new threat in the face of a ridiculously overvalued share price.

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