Is Sirius XM Holdings Inc. Topping Out?

Source: Sirius XM Holdings

In spite of reporting higher revenue and earnings that were in line with analyst expectations on April 24, Mr. Market refused to reward Sirius XM Holdings (NASDAQ: SIRI  ) shareholders much, sending the shares up less than 1%. Is this a sign that the company's share price has finally peaked and that investors should look to Pandora Media (NYSE: P  ) for gains, or does Sirius still have plenty of room to run?

Sirius beat on revenue but failed surprise on earnings

Source: Sirius XM Holdings

For the quarter, Sirius reported revenue of $997.7 million. This represents a slight beat over the $994.6 million analysts expected to see but was 11% higher than the $897.4 million the company reported the same quarter last year. According to the company's earnings release, the main driver behind its increase in sales was a larger subscriber base.

During the quarter, Sirius added 266,799 listeners, bringing its total listener base to 25.8 million. This is 6% above the level management reported a year ago and shows that Sirius is still capable of growth in spite of its already-large user base. Perhaps more impressive was the number of subscribers who pay for Sirius. Over the past year, this number ticked up 7% to 21.3 million, which means that a larger percentage of its listener base is sticking with and paying for the service.

In terms of revenue, Sirius gave investors a pleasant surprise, but the company could not do the same from a profitability perspective. For the quarter, the company reported earnings per share of $0.02. Although this may not seem all that impressive, it should be noted that the company's earnings fell in line with estimates and matched what management reported last year.

Source: Sirius XM Holdings

Unfortunately, there is some downside to the results reported by management. Its level earnings came at a time when revenue rose but net income dropped 24% from $123.6 million to $94 million. The main driver behind the company's declining profits was a combination of its revenue share and royalties rising from 16.6% of sales to 19.6% and a $27 million loss incurred from derivatives contracts. On a per share basis, these negative developments were offset by a 6.5% reduction in share count.

Growing competition from Pandora
Over the past four years, Sirius has seen its revenue increase at an impressive rate. Between 2010 and 2013, the company's top line expanded by 35% from $2.8 billion to $3.8 billion. According to the company's annual reports, the largest contributor to its rise in sales was subscriber count, which rose 27% from 20.2 million in 2010 to 25.6 million in 2013.

SIRI Revenue (Annual) Chart

SIRI Revenue (Annual) data by YCharts

While there's no denying that Sirius's growth has been attractive, it pales in comparison to Pandora's revenue growth. Over the same four-year period, Pandora saw its revenue skyrocket 336% from $137.8 million to $600.2 million. Like Sirius, Pandora saw its revenue rise because of an increase in users but Pandora's user growth expanded more rapidly, jumping 150% from 80 million to 200 million.

Based on these numbers alone, investors might think that Pandora is clearly better, but that may not necessarily be true. Yes, the company does have a larger listener count, but a smaller percentage of these pay for the company's service than in the case of Sirius. To understand the difference between these two companies, the Foolish investor needs to examine the profitability of each.

SIRI Net Income (Annual) Chart

SIRI Net Income (Annual) data by YCharts

In the case of Sirius, the Foolish investor can see that the company has been quite profitable. Between 2010 and 2013, the business saw its net income climb 776% from $43.1 million to $377.2 million, while Pandora clocked in a net loss that widened from $11 million to $27 million. This suggests that Sirius has chosen to grow at a slower pace than its peer but in such a way that it can not only turn a profit, but increase that profit over time. Pandora, on the other hand, looks to be more interested in growth irrespective of what that means for its bottom line.

Foolish takeaway
Based on the data provided, it looks like Sirius had a decent quarter but investors need to keep an eye on its net income to see if management can generate higher profits moving forward. Over the long run, the company has the potential to continue its growth, but with just 6% subscriber growth over the past year, it's beginning to look like Sirius's upside is somewhat capped.

Now, this doesn't mean that Pandora's a slam-dunk, but the business looks more interesting than Sirius at this point. On top of growing at a much quicker rate than Sirius, the business has a larger listener base it can eventually tap into to generate revenue. However, no company can generate losses in perpetuity. If Pandora is unable to turn its larger base and quick growth into a profit, its investors will eventually get fed up with the business.

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Read/Post Comments (6) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 27, 2014, at 1:40 PM, JJS wrote:

    Guess you see no plus in the buy back program instituted by SIRI as there was no mention of it in the aritcle. Was this intentional or is it a "doesn't make a difference" factor? Is it a case of reducing outstanding shares is not all that which it is cracked up to be? Unlike you, I'm a fool because my knowledge of stocks is on the minus side with not much room for an upswing.

  • Report this Comment On April 28, 2014, at 11:29 AM, goodguy36 wrote:

    I can tell you how to make SIRI move up. Let me sell out and watch it soar. Unfortunately for me, I can't afford to take the loss.

  • Report this Comment On April 28, 2014, at 1:48 PM, sjtea wrote:

    I believe that the used car market has yet to be touched. I know personally because I don't buy new cars and have yet to own one with sirius available. It's painful right now but I'm staying long SIRI

  • Report this Comment On April 28, 2014, at 8:30 PM, sirifair6 wrote:

    Market is a funny animal and operates by its own laws that I would call weird. Market is a perception thing. It appears that neither siri management nor liberty media are will to pump up the business at this time. On the contrary, they are suppressing any good news about the company. I am 99% certain why - the buyback time. The examples are right in front of us.

    Sirius XM produced a revenue two million shy of a one billion. It is not only obvious to idiots that they will meet their "over $4B" guidance. They know today the range because siri listeners pay upfront usually for the whole year or even two. After more than ten years in operation siri management can project with a very high degree of accuracy based on the first 100 days of the year.

    Every year they would normally update their guidance during the Q1 CC. This year they chose, I repeat "chose", not to. The natural question is why. At the very least, they could have easily announced with 99.99% accuracy that their revenue will exceed now $4.1B instead of the initial $4B since they possess more than enough data to support that. They did not. The answer to this question is the timing. They are buying back shares and enjoy doing that at low prices. On one hand, any long would love that since the company will be spending and naturally borrowing 30% less to buy back the same amount of shares at these ridiculously low prices vs. October 2013 that saw $4.18. On the other, is this honest, fair business? I am not the judge here. In the meantime they will continue with their plan of suppressed share price until it is liberty's time to sell its 600M shares for well over $4 or may be $5. What goes around, comes around.

  • Report this Comment On April 29, 2014, at 1:38 AM, Guggerpaul wrote:

    You failed to mention the management over at Siri are Malones puppets and they just do as their told. Malone caused a lot of unnecessary expense with his ridiculous bid for the company and that is one of the main reasons Siri did not beat earnings. They will do this for as long as they can get away with it and continue to buy shares back and then one day they will have shaken out all the weak hands and they will allow Siri to post their real earnings and this stock will fly. Malone is a powerful man with far reaching connections he can have people help him by writing articles about how a company that is loosing money every quarter is a better investment then Siri who's revenue beats records every quarter. Stevie Wonder could see this!

  • Report this Comment On May 01, 2014, at 8:54 AM, headybaldguy wrote:

    The author's assertion that SXM revenue growth is topping out is not borne out by the facts. Telematics and used car subs are just beginning to heat up. Within 3 years, the number of cars with satrads will double. from 60M to 120M, resulting in another significant revenue stream. Management has also guided to a doubling of the CVS division from 100M this year to 200M in 3 years. The drive for Hispanic listeners is just beginning with the increased number of channels devoted to Hispanics and the sweet sub deal that they can obtain. We have yet to hear about the service lane initiative which should bear some fruit. All in all, the author has neglected to consider these revenue sources in his analysis.

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Daniel Jones

Dan is a Select Freelance writer for The Motley Fool. He focuses primarily on the Consumer Goods sector but also likes to dive in on interesting topics involving energy, industrials, and macroeconomics!

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