When it comes to entertainment services, Sirius XM Holdings (SIRI -4.43%) and Netflix (NFLX 1.74%) have been dominating their markets since before premium platforms in their specialties were validated. No one was paying for terrestrial radio when Sirius and XM rolled out their satellite radio plans. No one was paying for streaming mainstream video when Netflix decided to give its DVD-receiving subscribers the mother of all digital plot twists.
Sirius XM and Netflix carved out their markets from scratch, and now they're enjoying the spoils of victory. Sirius XM has 34.3 million subscribers on its rolls, and Netflix commands an audience of 158.3 million streaming paid memberships worldwide. Investors have been rewarded handsomely for buying into the pioneers. Sirius XM and Netflix are two of the hottest consumer discretionary stocks over the past 10 years, an 11-bagger and a 35-bagger, respectively. They are ultimately very different companies, and this is when we turn our attention to figuring out which is the best fit for your portfolio right now.
Image source: Sirius XM Holdings.
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Sirius XM and Netflix have never had as many subscribers as they do right now. They are expected to continue padding their membership counts, but it's also not a surprise to see both platforms slowing as their markets mature. Sirius XM's revenue gains have decelerated to a single-digit clip the last four years, and only its acquisition of Pandora earlier this year has inflated its top line in 2019. Pro forma growth will clock in with single-digit growth for the fifth consecutive year.
Netflix is holding up better on the organic growth front. Its revenue bursts actually accelerated in each of the three previous years. The pace is decelerating now as Netflix experiences subscriber growth in its home market, but revenue still soared 31% in its latest quarter.
Both companies have flexed their pricing power as average revenue per user consistently inches higher for each platform. Netflix wins this race, too. It has been able to push through four substantial price hikes in its domestic market alone over the past five years, boosting its average revenue per user 9% over the past year. Sirius XM has limited its increases to passing on its gradually rising licensing costs to subs in the form of a music royalty fee as well as cross-selling add-on services, but it's also finding new ways to boost its ad rates for marketers. Average revenue per user at Sirius XM has risen 4% over the past year.
Now let's start talking Sirius XM's advantages in this fight. Unlike Netflix, the satellite radio monopoly operator actually pays out quarterly distributions to its stakeholders. The dividends may not amount to much given the current 0.8% yield, but Sirius XM has come through with 10% hikes in each of the past three years since initiating a payout policy.
Sirius XM is also cheaper. The stock trades at 25 times next year's projected earnings, roughly half of Netflix's 49 times Wall Street's profit target for 2020. Sirius XM also commands a slightly more favorable top-line valuation, as it's trading at an enterprise value that is 5.5 times its trailing four quarters against Netflix's 6.8 multiple. Netflix is growing a lot faster than Sirius XM, so a premium valuation here makes sense.
I believe that both investments will beat the market in the year ahead, and that's not just lip service. I've owned both stocks for years. However, if I had to put new money into either of the two companies, it would be Netflix right now. It's trading at depressed levels given recent concerns about the upcoming launch of big-name rival services. It's also easier to get excited about the undeniable trend for streaming television, which is only going to get hotter in the coming years. Sirius XM is at the mercy of auto ownership trends, which are gradually shifting into reverse. You can come out ahead with either stock, but Netflix gets the nod as the better buy this time around.
