Does Sirius XM Radio See Netflix in the Mirror?

Netflix (Nasdaq: NFLX  ) and Sirius XM Radio (Nasdaq: SIRI  ) both run popular subscription-based entertainment services, but the similarities don't end there.

Both have been market darlings over the past year, and both hit fresh highs this month. Conventional metrics also tag both stocks as overvalued, with no shortage of short positions to prove it.

In addition, both companies also had to overcome adversity to reach their current heights. Sirius XM publicly threatened to file for bankruptcy before Liberty Capital (Nasdaq: LCAPA  ) lent a hand. Netflix has never had balance-sheet hang ups, but its very model was threatened when competitors engaged in cutthroat pricing and the DVD market began to peak.

They've both come a long way -- and each company can learn at least one valuable lesson from the other.

Pick your poision
Satwaves' Brandon Matthews wrote a thought-provoking piece last week comparing Sirius XM to Netflix. I respect Matthews, who's been following satellite radio for a long time. However, I believe he may have been cherry-picking metrics to make the satellite radio giant look better than the movie rental juggernaut.

In some ways, the two companies are reasonably alike. Sirius XM expects to close out the year at least 20.1 million subscribers. Netflix is targeting as many as 19.7 million couch potatoes. Since monthly subscribers pay roughly the same average amount for either service, it shouldn't be a surprise to see analysts expecting $3.1 billion in revenue from Sirius XM next year, and $2.9 billion on Netflix's top line.

However, Netflix sports far healthier margins, with Wall Street expecting far greater profits from the video service.

Nonetheless, the market believes that Sirius XM is more valuable at the moment. With 6.4 billion shares outstanding and another $3 billion in debt, Sirius XM commands an enterprise value of roughly $11.7 billion. Netflix, with a small net cash position and a share-buyback-shrunk outstanding share count of less than 54 million, has an enterprise value roughly $3 billion less than Sirius XM's.

Matthews chooses Sirius XM in a side-by-side comparison, but his matchup is not exactly a fair fight.

He points out how Netflix's monthly churn -- down to 3.8% in its latest quarter -- is more than twice as high as Sirius XM's recent 1.8% rate. That's not surprising. Netflix subscribers pay month-by-month, whereas Sirius XM accounts receive significant discounts for paying quarters, if not years, in advance. Signing up and letting go of Netflix is also just a matter of a few mouse clicks, whereas satellite radio fans require a special receiver to consider the process. Matthews also fails to point out that Netflix's subscriber acquisition costs run $19.81 per gross addition, a third of Sirius XM's $59 rate.

Another point missing here is growth. Netflix is smaller at the moment, but it's growing a lot more quickly. Netflix tacked on 1.9 million net new subscribers during the last three months -- more than Sirius XM has landed during the past two years!

There's a reason why the pros see Netflix growing revenue by 32% next year, stacked against a more modest 9% top-line advance for the satellite radio star.

This doesn't mean that Sirius XM won't be the better investment. Now that it's routinely profitable, its $8 billion in tax-loss carryforwards will come in handy. The tax savings alone on future profits closes the $3 billion valuation gap between Sirius XM and Netflix.

Before you choose between the two, consider what the upside of one may mean to the other.

Teaching Sirius XM a Netflix trick
Critics knock Sirius XM's potential market, limiting the service's appeal to active North American commuters. Satellite radio has been a disaster abroad -- and Sirius XM doesn't have access to the necessary satellites.

However, the strategy that could save Sirius XM from these limitations could come straight from Netflix's playbook. Netflix launched a streaming service in Canada last month, opening a friendly market to the north without having to build out a network of regional distribution centers or deal with DVDs. A European push is likely next.

Could the Web also power Sirius XM's international push? The company is no stranger to streams; it offers Internet-only service at a steep discount to active subscribers. Since last year, it's launched apps for Apple (Nasdaq: AAPL  ) , Research In Motion (Nasdaq: RIMM  ) , and Google (Nasdaq: GOOG  ) Android smartphones. But beyond international licensing issues, the key hurdle lies in establishing the market for premium radio.

Netflix won't have an easy ride, since it's competing against pay cable and satellite television. But Sirius XM will have a harder path, battling both free radio and free music-discovery sites. It also doesn't help that Worldspace -- the once-ambitious push for satellite radio abroad -- was a huge flop.

However, plenty of bears once figured that Sirius and XM -- after billions in cumulative losses -- could never turn a profit. Sirius XM cleared that obstacle, and it could enjoy a huge payoff if it can establish a global beachhead in premium streaming radio.

Teaching Netflix a Sirius XM trick
Netflix can also learn something from Sirius XM. A common knock against the rental giant is that its streaming service is largely limited to older and obscure titles. That's not a fair criticism, though; Netflix has spent considerable sums to nab fresher content, though it may never match the hottest releases on pay-per-view or first-run rental stores.

In a similarly tricky climate, Sirius XM uses exclusive content -- from Howard Stern to Opie & Anthony, from Oprah Winfrey to Martha Stewart Living Omnimedia's (Nasdaq: MSO  ) namesake celebrity -- to keep subscribers close. Commercial-free music in deep genres is a major contributor, but folks can get that by simply loading their iPods or streaming through their smartphones.

Exclusive programming is sticky, and Netflix is now in a position to strike streaming deals for original content that isn't available elsewhere. Nobody else can even begin to pay what Netflix can for its active video-streaming audience of more than 11 million of its subscribers.

Buy the better stock -- or stocks
I'm a Netflix shareholder, and a subscriber to Netflix, Sirius, and XM. I believe in satellite radio. I also naturally believe in Netflix.

I think both stocks can beat the market, though I think Netflix is slightly less outrageously overvalued than Sirius XM.

How can I feel that two stocks with lofty valuations can still beat the market? Well, go back a year. Folks were saying the same thing about Sirius XM and Netflix then, and both stocks have been big winners since, burning the shorts along the way.

Don't get in the way of a profitable company with a growing base of users, improving fundamentals, and strengthening retention.

Google is a Motley Fool Inside Value recommendation. Google is a Motley Fool Rule Breakers pick. Apple and Netflix are Motley Fool Stock Advisor recommendations. The Fool owns shares of Apple and Google. 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.

Longtime Fool contributor Rick Munarriz has been a Netflix shareholder -- and subscriber -- since 2002. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (11)

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  • Report this Comment On October 26, 2010, at 11:08 AM, Brent2223 wrote:

    How is comparing churn not a fair fight? Are you implying there are lots of pent up cancelations in SIRI due to their terms? Are you saying churn numbers are being manupulated or reported incorrectly? Otherwise, it seems that SIRI does a better job in signing up commited members, which will form a much stronger base than the fly by night netflix customers. The other difference in the companies is content, where SIRI has a much wider moat than netflix who is just a distributor.

  • Report this Comment On October 26, 2010, at 11:21 AM, gmanxrayz wrote:

    HUGE GROWTH!!!c 2011

    (from msg board)

    As you all know on October 20th, the FCC ruled that SiriusXM has the right to choose the company or companies who lease 4% of the satellite radio spectrum. It just so happens we have the names of the applicants and we can better answer the question: If you were Sirius and you wanted to use this leasing process to your advantage by picking the applicant who will help you reach as wide an audience as possible, who would you choose ?

    #2 on the list (Entravision) jumps out here

    http://www.radiosurvivor.com/2010/10/20/...

    Think about this statement for a minute.

    "The Spanish language media company suggested a plan that would make it possible for a single entity to take all the channels."

    One company with, not just the ability but the NEED and WILL to purchase ALL 4% of the available satellite radio spectrum for lease.

    What exactly is Entravision and what does it mean for the potential reach of Sirius/XM?

    About Entravision - (From Wiki)

    "Entravision Communications Corporation (NYSE: EVC) is a media company based in Santa Monica, California. Entravision primarily caters to the Spanish-speaking Hispanic community and owns television and radio stations and outdoor media, including billboards, in several of the top Hispanic markets. They are the largest affiliate group of the Univision television network"

    About Univision (from wiki)

    Univision is a Spanish-language television network in the United States. It has the largest audience of Spanish language television viewers according to A.C. Nielsen ratings.

    Who is their star entertainer, TV and radio personality?

    His name is Eddie "Piolín" Sotelo, a Mexican radio personality, born in Ocotlán, Jalisco, in 1972.

    (From wiki)

    "Apart from his commitment to his listeners, Eddie “Piolín” Sotelo is also one of the most televised radio personalities in the nation with regular appearances on national shows like Sábado Gigante, Cristina, Escándalo TV, Qué Dice la Gente, Don Francisco Presenta, and interviews on CNN, Fox News Channel, Larry King, MSNBC, Anderson Cooper, and Good Morning America, to name a few.

    This philosophy for putting the audience first has earned Piolín por La Mañana the top ranking for morning shows in Los Angeles (regardless of language) and its 50 syndicated markets and growing make it the #1 Radio Show in the country....

    I repeat THE NUMBER ONE RADIO SHOW IN THE COUNTRY

    NUMERO UNO.

    More from wikipedia...

    "Piolin can now be heard on over 100 radio stations on the Spanish language format, such as KLOB 94.7FM of Palm Springs where it is also #1 in ratings in that radio market."

    Do you you see where this is going????

    Can you say MEXICO CITY???

    "According to the most recent definition agreed upon by the federal and state governments, the Mexico City metropolitan area population is 21.2 million people, making it the largest metropolitan area in the Americas"

    Can you say, EXPANSION, into MEXICO?

    Can you say expansion into SOUTH AMERICA?

    Can you say SiriusXM, the world's largest media network?

    SIRIUSXM, THE WORLD'S LARGEST MEDIA NETWORK

    Sentiment : Strong Buy

  • Report this Comment On October 26, 2010, at 11:35 AM, joshpritchard wrote:

    Can you clarify how you're calculating SIRI's enterprise value? The market cap is ~$5.3B, then 3B in debt -- I get to just over $8B... which is lower than NFLX... what am I missing?

  • Report this Comment On October 26, 2010, at 11:51 AM, superdave1459 wrote:

    I like the way Matthews always skews his metrics to prove what a great investment SIRI is. Of course he's been wrong for so long he is nothing but a pathetic writer.

    Churn is higher due to monthly vs annual payments. Nothing wrong with that. Also look at how many they got, twice what SIRI got last year and still growing. In no time netflix will have 30 million, but it will take SIRI 30 years to get there.

    Lastly, the fantasy of a Spanish company owning all 4% is a good display of a blind gambler in love with his stock. Did you not even read the rules? It figures because that's how you buy your stocks, with no due diligence. The rules state no one company can own more than 4 channels, and a channel simulcast on SIRI and XM = 2 channels.

    Netflix is hands down the right investment. Sirius is still just a big gamble, especially with the internet technology about to explode in our cars and all the smart phones.

  • Report this Comment On October 26, 2010, at 12:14 PM, gmanxrayz wrote:

    This blind guy is up 65K...I guess I'll have a hard time driving my new 911 this spring lol

    Lastly, the fantasy of a Spanish company owning all 4% is a good display of a blind gambler in love with his stock. Did you not even read the rules? It figures because that's how you buy your stocks, with no due diligence. The rules state no one company can own more than 4 channels, and a channel simulcast on SIRI and XM = 2 channels.

  • Report this Comment On October 26, 2010, at 12:51 PM, southernbeachguy wrote:

    I own Netflix & Sirus stock, I have done better with Sirus and think they will be one to generate the biggest future profit.

  • Report this Comment On October 26, 2010, at 1:49 PM, Fredlee009 wrote:

    Even your bullish articles suck. This is a terrible comparison. You lost me when you said you respected Mathews. You respect a guy who said Sirius XM was guaranteed enacting a r/s by Q1 of 2010, who suggested hedging this stock at 95 cents (go look at the chart when he said it too) very bottom of this move, and to sell at 60 cents if a r/s worried u, because it was coming , get used to it. You probably respect Mousallenii too.

  • Report this Comment On October 26, 2010, at 2:44 PM, brandonmatthews wrote:

    Nice rebuttle! Thanks for the plug. Mind if i drop off a link to my case?

    http://satwavespro.com/2010/10/17/siri-valuation-concerns-ta...

  • Report this Comment On October 26, 2010, at 4:21 PM, waterinfo wrote:

    Nearly every discussion about the future potential of SiriusXM (SIRI) omits the potential from additional advertising revenue from non-commercial free channels. This is certainly something that Netflix can't duplicate. If SiriusXM is smart, channels with commercials will be made available to anyone who has the receiver but chooses not to subscribe to the paid service. If you want commercial free services, or certain "premium" channels (like Howard, or CNBC, or MLB, or NFL) then you have to pay the monthly subcription fee. Radio spot advertising varies from as little as $50 per minute in Alaska to $3000 per minute in New York City. On each commercial SiriusXM channel, there are more than 100,000 minutes of advertising opportunity per year. If people are willing to pay between $50 and $3000 per minute for a spot ad in a single city, what might a spot be worth on a radio channel with a national footprint, and millions of listeners? Even at a modest $500 per minute, SiriusXM has an advertising revenue capacity of $50,000,000 per year per channel. If roughly half of the SiriusXM channel carry commercials (e.g. 100 channels), Sirius has a revenue opportunity of $5 Billion by over the next few years, a very large percentage of which would drop directly to the bottom line. (Also, keep in mind that nearly every household in the country is paying between $30 and $150 per month for cable or satellite TV service, and nearly every channel carries commercials.) Add another $0.50 to $0.75 per share of profit to the other forecasts, and what will a SIRI share be worth then.

  • Report this Comment On October 26, 2010, at 4:49 PM, waterinfo wrote:

    Some people keep raising the issue of Internet streaming being a potential competitor to SIRI. SiriusXM is much, much more than music. An entire industry of Internet based broadcasting with programming way beyond music would have to grow up, without any obvious source of revenue. After all, you can't tag a display ad onto a "commercial free" audio service over the Internet.

    However, more fundamental is the fact that any talk about internet streaming of entertainment to a MOVING VEHICLE is ridiculous.

    If my music (or talk show, or NFL game, or NHL game, or MLB game, or anything else that I wanted to listen to) sounded like my "cell phone" does in a moving car, I wouldn't be listening very long. Not to mention the program "dropping" one out every three or four connections.

    In addition, I am one of the Americans, still in the majority that does not have on unlimited data streaming contract with a cell phone carrier. I'm not about to get a $50 to $100 per month such contract to avoid my $15/month Sirius subscription fee.

    If the population of wireless 3G or 4G internet users were to reach a majority of the "drivers", there is not enough bandwidth in the total spectrum to support unlimited streaming to 100 million or more vehicles. The cell phone companies would have to price unlimited streaming so high if that ever supplanted satellite distribution to force people back to regular radio if there were no SiriusXM. (A beauty of satellite radio is that the same signal that serves 20 million customers will serve 100 Million or even more customers with no additional capital equipment. You can't do that will cell phones and internet streaming).

    I recently completed a one week, 2600 mile driving trip. My satellite radiio (original equipment in my Acura) was a constant companion. 10 of my favorite channels preprogrammed. When I got tired of one, a quick button push (from the steering wheel) without looking up from the road got me to my next favorite. No distraction trying to focus on an IPhone or some other intractable internet device.

    Other services may limit SiriusXM growth to fixed locations like businesses and residences. But there is no technological alterative that is as cost effective, spectrum efficient, and relatively cheap and simple as direct satellite broadcast for moving vehicles.

  • Report this Comment On October 26, 2010, at 7:21 PM, TMFBreakerRick wrote:

    Brent, the "fair fight" comment relates to singling out churn -- without pointing out that Sirius' subscriber acquisition costs are three times greater than Netflix ($59 vs. $19).

    Josh, the "market cap" figure quoted in Yahoo! Finance and perhaps a few other sources is as of the end of last year. It does not factor in LCAPA's 40% stake, which is now part of diluted shares outstanding (since SIRI is profitable). Check the last quarterly report. There are 6.4 billion shares outstanding. Multiply that by the current stock price to arrive at market cap. Tack on the net debt position for enterprise value.

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