There was a time -- a decade ago -- when penny stock traders speculating in Sirius XM Holdings (SIRI -1.49%) talked up the potential of Apple (AAPL 0.74%) buying up the then-fledgling premium radio monopoly. Sirius XM had completed the long overdue combination of the country's two satellite radio providers in early 2008, but it was still losing money with big debt repayments around the corner. By early 2009, it seemed as if it was only a matter of time before it would file for bankruptcy, until a timely investment gave it just enough rope to pull itself up into being the consistently profitable media giant that it is today.
By the time Jim Cramer was talking up Apple buying Sirius XM on CNBC's Mad Money three years ago, it was Sirius XM and its well-rewarded investors who would likely balk at an exit strategy. Though Apple has been a monster investment over the past decade, Sirius XM has fared even better. Now, the two market darlings are going head-to-head in the premium radio market. There's a lot at stake here, but let's size up each stock to see which one will be the bigger market beater in the future.
Sweet streams are made of these
Apple is a tech behemoth that until a handful of months ago commanded the largest market cap in the country. Apple Music -- the premium streaming service that competes with Sirius XM and its recently acquired Pandora -- is a small part of the iPhone producer's empire, but it is an important part of Apple's fast-growing services revenue. Even though Apple Music was late to the music streaming game, it became the leading premium streaming service in North America earlier this year.
Sirius XM does most of its handiwork in cars with factory-installed receivers, but the line is blurring with the popularity of the connected car. Most new vehicles allow drivers to seamlessly stream their mobile apps through vehicle dashboard speakers via Bluetooth, but this has never been a "winner-take-all" market. Sirius XM continues to grow its subscriber rolls with every passing quarter, closing out the second quarter with a record 34.3 million total satellite radio subscribers including 29.3 million self-pay members.
Growth has slowed at both companies. Apple's top line has actually posted year-over-year declines in two of the past three quarters, slowing to 1.5% growth over the past four quarters. Apple's been here before. There are ups and downs between tentpole iPhone releases every few years. Sirius XM's deceleration is steadier. Top-line gains have slowed in five of the past six years, decelerating to 6.4% last year. The acquisition of Sirius XM is increasing top-line results, but things continue to slow down for its original satellite radio business.
The bottom line
When it comes to profit multiples Apple is the cheaper stock. Looking out to next year -- because this year's results at Sirius XM are being held back by the Pandora acquisition -- Apple and Sirius XM are trading at 16 and 23 times earnings, respectively. Apple is expected to grow its profitability at a slower clip, and by 2022 both stocks are projected to be trading with P/E ratios in the mid-teens.
Sirius XM feels riskier, as all of its eggs are in the basket of premium radio. Apple is naturally more diversified, but the iPhone still accounts for 56% its revenue -- a problematic outlier as its the only one of Apple's five categories to post a decline in revenue through the first nine months of this fiscal year. Sirius XM is the more volatile investment, but an interesting nugget is that if the stock trades higher in 2019 -- as it is at the moment -- it will be 11 consecutive years of positive returns for shareholders.
Both stocks have positive catalysts to offset the growth hiccups. Apple's already booming services revenue is going to get a nice lift when Apple TV+ launches later this year. There will be a lot of synergies for Sirius XM to milk with Pandora, making it a force in both satellite radio and streaming. Both stocks should beat the market in the year ahead -- and I personally own both. Given Apple's knack for innovating its way higher it feels like the smart play for long-term growth.