Satellite radio and audio-streaming veteran Sirius XM Holdings (NASDAQ:SIRI) has a lot in common with video-streaming giant Netflix (NASDAQ:NFLX). These two companies essentially willed their respective target markets into existence many years ago. They are leaders in their chosen fields, facing off against a plethora of strong competitors.
Furthermore, many investors view both of these stocks as high-growth investments. That's a mistake. Sirius hasn't been a serious growth stock for years and Netflix has a ton of high-octane business growth left to explore.
What's wrong with Sirius?
I'm saying this as a shareholder of both Sirius and Netflix and I have no intention of closing my Sirius position. The satellite radio expert and Pandora owner is a reasonable bet on the wider digital media market, and it comes with value-investment hallmarks such as a low price-to-earnings ratio and a modest dividend yield.
There's a place in my portfolio for a ticker with these qualities, but I don't expect a whole lot of earnings growth, rising revenue, or fantastic stock returns from my Sirius position.
How Netflix will grow from here
Netflix is a completely different ball of Wall Street wax.
If Sirius is a mature dividend payer whose most reliable growth vector is found in acquisitions these days, Netflix is a vibrant company on the rise. This stock is poised to keep crushing the broader market for years to come thanks to a handful of important catalysts:
- It's a great big world out there and Netflix has a lot of it left to conquer. Second-quarter sales rose 44% in the Europe, Middle East, and Africa (EMEA) region while the Asia-Pacific (APAC) division reported 63% year-over-year revenue growth. It will take many years before Netflix runs out of low-hanging fruit in these regions, especially since broadband access and online payment systems are becoming more available in many emerging markets.
- The company offers a valuable service at a very low monthly cost to consumers. Netflix has plenty of room to raise its monthly fees over time, supported by a rapidly growing portfolio of high-quality original content. The average revenue per user (ARPU) rose 5% year over year in the second quarter, adjusted for currency exchange headwinds.
- The content production side of the business is in limbo due to COVID-19 pandemic restrictions, forcing Netflix to pocket some cash profits that would otherwise have been used to finance more original shows and movies. 2021 will dip back into negative cash flow territory, but the era of sustainably positive free cash flow lurks just a couple of years further down the road. When Netflix reaches that tipping point, even the permabears will have to change their tune. In the long run, Netflix is a strong content studio paired with a low-cost distribution system wrapped in a brand name with global recognition.
Netflix shares have gained 59% over the last year and the stock is trading just below the all-time highs it reached a couple of weeks ago. You know, like a proper growth stock often does. Sirius fell 4% in 52 weeks and its share prices sit more than 20% below February's annual highs. As I said, Sirius may appeal to income investors and slow-burn value buyers, but Netflix is the better growth stock by far.