Netflix
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
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
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
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.
