Will the introduction of Apple Music disrupt the streaming music sector? How will Apple's (AAPL) entry into this field change the fortunes of one of its more established names, Pandora Media (P)?
Apple has hit a few sour musical notes in the recent past. The company's iTunes Radio product hasn't caught on, and it suffered a backlash due to its handling of U2's Songs of Innocence album. Considering the company's track record, why would investors feel confident about Apple Music?
I don't know if Apple will conquer the streaming music world, but it doesn't have to win in order for Pandora to lose. Apple Music won't make or break the tech giant, but it could make life miserable for streaming music competitors such as Pandora, Spotify and Rdio.
As of last year, total annual streaming music revenues were estimated at $1.87 billion, according to the Recording Industry Association of America. The streaming music pie will continue to grow, but it'll also be divided among more and bigger players. That reality is reflected in Pandora's chart.
Pandora has been hammered, but technically speaking, it still isn't time to buy this stock. Yesterday, Pandora shares closed beneath their 50-day moving average (blue) for the first time since March. The stock has been trapped beneath its 200-day moving average (red) for nearly a year. Pandora's MACD (moving average convergence/divergence) indicator is trending downward, and gave a sell signal on June 1 (arrow). The path of least resistance here is lower.
Pandora's fundamentals are as bad as its technicals. Even after its decline to $17 from $40, the stock trades at 37x next year's anticipated earnings, and its price-earnings to growth ratio (PEG ratio) is much too high at 1.78. I have to question if Pandora is really worth its current market cap of $3.75 billion.
The Apple Music concept does make sense. Plenty of consumers already listen to Pandora, Spotify, and Sirius XM (SIRI) on iPhones and iPads. Why wouldn't those same customers listen to the same music if it originated from Apple?
Jim Cramer and Jack Mohr, co-managers of Jim Cramer's charitable trust, Action Alerts PLUS, seem to agree. In a note on Apple's Worldwide Developer Conference published today, they comment on the new streaming service, saying "Apple currently has over 800 million iTunes accounts it can leverage and we believe Jimmy Iovine further expands Apple's credibility with musicians." (Apple is a holding in the Action Alerts PLUS portfolio.)
However, while Apple Music seems like a slam-dunk, it isn't. It comes down to execution, and that's where Apple has failed in music. How can you go wrong giving away a free U2 album? By failing to understand that to many of us, music is a highly personal, emotionally charged topic. Music fans don't like to be told what to listen to. I'm still not convinced that Apple gets this point; its "global radio station" concept sounds like the latest misstep along these lines.
Is Apple Music a Pandora-killer? Maybe not, but its presence will disrupt the market and make it difficult for Pandora to grow into its astronomical valuation. Unless the company is bought out at a premium, I see no way for Pandora to come out ahead.
This commentary originally appeared at 9:30 a.m. on Real Money Pro -- the ultimate traders' resource for actionable trade ideas and in-depth market analysis. Click here to learn more.