Sirius XM (SIRI 1.30%) and Netflix (NFLX 2.90%) offer popular subscription services, but their fortunes could go in vastly different directions in the coming years. One of them faces significant risks while the other has a huge opportunity ahead, which makes one of them the better buy.
Sirius XM's fourth-quarter earnings report in early February showed its core satellite radio business reached 30 million self-pay subscribers, people who are paying for their own subscription, and another roughly 5 million paid promotional subscribers, who are receiving a free trial subscription paid for by a car company.
In total, the overall subscriber base grew 3% compared to a year earlier, which is fairly anemic growth and worrisome for a subscription business. In any given period, subscription businesses have a certain number of new subscribers and a certain number of cancellations, and the turnover is known as "churn." It wouldn't take much of a slowdown in new subscribers or an uptick in churn to topple that 3% growth rate into negative territory, and if that happens, it would be easy to imagine investors losing confidence in the company's long-term prospects.
This is especially true in light of some serious risks the company faces. Howard Stern has an exclusive contract with Sirius XM that expires this December, when he plans to retire from radio. Sirius XM will retain the rights to his library for another seven years, but it's unclear how many die-hard Stern fans will remain subscribers. Another risk is a future when all cars have embedded modems, and streaming competitors like Spotify are more easily accessible in the car than they are today. More competition in the car could potentially create headwinds to the company's subscriber count, its pricing power, or both.
There's been significant concern in the investment community about the potential impact new streaming competition from Apple, Disney, and others will have on Netflix. The first test occurred in the fourth quarter of 2019 when AppleTV+ and Disney+ launched in the U.S. and elsewhere. During that quarter, Netflix had 8.8 million global paid net subscriber additions, smashing management's guidance of 7.6 million. The vast majority of that growth came internationally, while the company added 548,000 new subscribers in the U.S. and Canada. In the U.S., Netflix added about 420,000 subscribers, which missed management's guidance of 600,000.
The company did feel some competitive pressure in the U.S., but the mass cancellations that some feared have not occurred. More importantly, Netflix's international growth appears to be accelerating. One potential catalyst for that is the cheaper mobile-only plans that the company is testing in certain international markets, including India, Malaysia, Singapore, and the Philippines.
Big picture, there are an estimated 1.7 billion global households, excluding China, were Netflix doesn't operate. With normal population growth and household formation rates, that should exceed 2 billion in 20 years. Over that length of time, high-speed internet penetration rates should increase significantly. If 80% of the world's households have a fixed internet connection by then, that would mean about 1.6 billion households outside of China would be connected.
Given what we know now about video-on-demand, it seems likely the vast majority of them would pay for a subscription streaming service. Globally, there are already over 1 billion pay-TV households, which highlights the willingness of people all over the world to pay for premium at-home video entertainment. And Netflix should keep gaining customers given its less-than-cable cost.
Considering how far ahead of competitors Netflix is in paying subscribers, engagement, and content budget globally, plus its broad content strategy that will increasingly appeal to the masses in virtually every global market, this is Netflix's game to lose. While streaming competitors will not be standing still, none of them can keep up with Netflix's content spending because they don't have the subscribers and subscriber revenues to justify it. That's why even tech giants like Amazon and Apple, which have the resources to match Netflix's content spending, aren't doing so. And without enormous content spending, they have no chance of displacing Netflix as the global streaming king.
Considering Netflix currently has 167 million paying subscribers -- only about 10% of the global internet-connected households that could exist in 20 years -- its global runway ahead is enormous.
The better buy
Given Sirius XM's low single-digit subscriber growth rate, the risks it faces from Howard Stern's retirement, and the growing streaming competition in the car, it's hard to have tremendous confidence about the company's future. On the other hand, Netflix's huge global opportunity and its scale advantages set up a long runway for growth. That's why investors should consider Netflix a better buy than Sirius XM.