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Pandora Shares Fall as Apple's iRadio Soars

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Shares of Pandora Media Inc (P - Free Report) plunged 10.1% ($2.73) to close at $24.26 on Sep 23, after its newest competitor Apple (AAPL - Free Report) announced that the iTunes Radio service attracted more than 11 million unique listeners within a week’s time.

Apple released its music streaming service iRadio with its latest iOS7 mobile operating system for iPhones and iPads on Sep 18. Since then customers have downloaded iOS7 on more than 200 million devices.

The iRadio service is designed along the lines of Pandora’s service, which allows users to create stations based on songs of their choice (including Twitter trends), which they can also share with friends. The service offers more than 200 free stations primarily supported by brand advertisements.

Additionally, iRadio offers cross-platform features, which allow access to users of other platforms including Pandora and Google’s All Access. Apart from close integration with iTunes, iRadio will also be available on the newly-launched Mac OS and Apple TV software.

Apple’s iRadio service also competes with the Internet radio service of Sirius XM (SIRI - Free Report) and Spotify. We believe that Apple’s service will quickly gain significant market share due to the huge popularity of iPhone and iPad devices and the massive iTunes library.

However, we note that Pandora enjoys a first mover’s advantage in the music streaming industry. Pandora’s already popular service (approximately 72 million users), driven by its effective discovery engine and well established infrastructure, will provide significant competition to Apple in the near term.

Pandora recently announced an expanded stock offering (13 million up from 10 million at $25.00), which will fetch it approximately $378.8 million. Pandora expects to use a portion of the proceeds for making strategic acquisitions that will boost subscriber base. The company will also open new sales offices and compete with radio stations for attracting local advertising, which is currently a $15.0 billion market.

However, Pandora expects advertising revenue growth to slow down and lesser listener hours in the near future, particularly due to increasing competition. In August, Pandora reported 1.35 billion listening hours for the month, up 16% from a year ago. Pandora expects to continue to report losses in the near term.

We believe that Apple’s growing influence in the music streaming industry will increase competition for the likes of Pandora, Sirius and Spotify. In such a scenario, the quality of service, strength of brand advertisement and partnerships with leading music companies will differentiate the operators going forward.

Currently, both Apple and Pandora have a Zacks Rank #3 (Hold).

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