Sirius XM (SIRI) and Spotify (SPOT 0.20%) have been competitors for years, but they have mostly stayed off each other's turf. Sirius XM's primary niche has been satellite radio in the car and only in the U.S. while Spotify is a global audio streaming business with much more listening outside of the car on mobile phones and other devices. But today the two companies are beginning to compete more directly, thanks to Sirius XM's 2019 acquisition of U.S. streaming player Pandora, its efforts to grow outside of the car, Spotify's efforts to grow in the car, and both companies' initiatives in podcasting. But which of these two consumer technology companies is the better buy today?
Sirius XM generates lots of cash but is barely growing
Sirius XM is a very profitable, high-margin business that generates significant amounts of cash, but its growth is slowing. Last quarter, Sirius XM grew its U.S. subscriber base by about 3% to almost 35 million, which is about 13% of the 265 million cars on U.S. roads. It's also about 28% of the 123 million cars that are enabled to receive the company's satellite signal. This "enabled fleet" should grow over the next decade because at least 80% of new cars built this year and beyond are expected to have a Sirius XM radio built-in. As older cars are scrapped and replaced by new cars, 80% of which will be enabled, the enabled fleet should slowly increase. That's why management expects the enabled fleet to increase from 123 million to over 220 million over the next decade. That gives the company an opportunity to slowly grow subscribers for a long time.
However, even this slow growth scenario is not guaranteed. One risk is that the company's contract with Howard Stern for new content ends in December of 2020 and Stern plans to retire from radio. His library content will still be on the service for at least another seven years beyond that, but whether that will be enough to retain Sirius XM's subscribers who listen primarily for Stern remains to be seen.
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Another big risk is Sirius XM's position in the car may be vulnerable as streaming competitors make inroads. Unlimited cellular data plans are getting cheaper and more ubiquitous, which means more people are likely to stream audio in the car from companies like Spotify instead of listening to satellite radio. Over the long term, cars themselves are likely to have embedded modems with the ability to stream these services right from the dashboard. As a result, it's not crazy to think that more competition could hurt Sirius XM's subscriber count and/or how much it's able to charge for its service.
Spotify is growing users rapidly and has a much larger opportunity
By comparison, Spotify is growing its user base rapidly all around the world. The company grew its total monthly active users (MAUs) and its paying subscribers by 30% and 31% last quarter, respectively, and more importantly, appears to have a big global opportunity that Sirius XM doesn't have. Management believes its addressable opportunity is the three billion "payment-enabled" smartphones in its current and future territories. Over time, this number should increase as global smartphone proliferation continues. The 248 million MAUs it has today is a small fraction of the users it could potentially have over the long term, suggesting a very large opportunity ahead.
One advantage Spotify has over satellite radio is the interactive data it receives on user listening behavior. That allows Spotify to excel at personalized playlists and artist discovery, which makes the listening experience uniquely tailored to each listener. That drives a user experience that satellite radio can't match since the satellite signal is a one-way signal -- meaning Sirius XM doesn't know who is listening to what, when, for how long, or even if someone is listening at all. Spotify has a related advantage over other streaming players because it has far more users than its streaming peers and its users are far more engaged. That leads to more user-listening data to crunch in its efforts to personalize the user experience.
Spotify also has compelling growth opportunities in podcasting and allowing music labels and artists to promote their music on the service. And over the long term, Spotify's growth and diversification into all forms of audio is likely to give it more negotiating power with the music labels. As a result, I think there's more upside to Spotify's profit margins than most people expect. Founder and CEO Daniel Ek appears to agree -- he recently bet 14.6 million euros that the company's stock will be higher than $210.80 by July of 2022. For these reasons and others, I think Spotify is a better buy than SiriusXM.
