When Apple Inc. (NASDAQ:AAPL) enters another company’s territory, the market takes notice. That’s exactly what happened on June 3, when news surfaced that the technology giant intends to offer a radio internet service.
If there’s any company in the world that did not want to wake up to this news, it’s Pandora Media Inc (NYSE:P), and for good reason. Pandora offers its own namesake internet radio service, and the stock was hit extremely hard on the day the news surfaced.
While Apple Inc. (NASDAQ:AAPL) itself has not commented, the tremors are already being felt throughout the market. Investors need to understand what’s at stake here, and it’s my advice that they should avoid Pandora Media Inc (NYSE:P) entirely.
Pandora’s business is at risk of permanent damage
This news bodes extremely poorly for Pandora Media Inc (NYSE:P). Not only is Pandora operating in an industry already rife with fierce competition, as noted by the presence of similar services such as Spotify, but CNBC reported that Apple may offer iRadio as soon as next week, and will be able pay double Pandora’s ad cut to publishers.
Let’s not forget Apple’s massive reach. Half a billion people buy music from iTunes, whereas Pandora Media Inc (NYSE:P) has 70 million active users. Apple Inc. (NASDAQ:AAPL) will also integrate its radio service with its iTunes. Internet radio essentially represents lost business for Apple’s iTunes service, and you can bet Apple would like to change that.
Apple’s reported foray into online radio represents a major threat to Pandora Media Inc (NYSE:P)’s business viability. Let’s get real: it’s not like Apple Inc. (NASDAQ:AAPL) is some start-up being run out of a garage (anymore). To say that Apple is the 600-pound gorilla in the room is likely an understatement. The world’s most valuable company carries the heft of a $420 billion market value. Put simply, if Apple has targeted a company’s business, that company is at high risk of getting steamrolled.
This is precisely why Pandora declined by more than 10% on the day of the announcement that Apple has the internet radio service in its sight.
Don’t open Pandora’s box
There’s plenty of arguments on both sides of the Apple coin. However, while the company’s detractors can say what they want about the company’s status as an innovative pioneer, there can be no doubting the numbers on paper. We can’t be sure that iRadio is a certain hit, but we can say that the company is in a formidable financial position.
Consider Apple Inc. (NASDAQ:AAPL)’s gigantic cash pile (currently $145 billion in cash, equivalents, and short and long-term marketable securities), as well as the strength provided by $41 billion in net profit last year, and you can clearly see that Apple certainly has the financial power to enter a new business if it wants to. Put simply, Apple’s massive innovative and financial resources mean this is a fight that Pandora simply doesn’t want to get into.
Prior to this announcement, I would have considered a potential buyout from Apple Inc. (NASDAQ:AAPL) one of the best reasons to own Pandora. However, with the news that Apple is instead likely to offer a competing service, the buyout premium is gone. Pandora Media Inc (NYSE:P) investors need to take an extremely cautious view of the company in light of this news, and decide whether they’re willing to go to war with the most valuable company on the planet.
The article This Internet Stock Is in Serious Trouble originally appeared on Fool.com and is written by Robert Ciura.
Robert Ciura owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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