Music slingers Sirius XM Radio
In the darkest hour of 2009, Sirius XM traded for just a nickel. A year later, it was up quite a bit but still struggling to get above the $1 share price that would keep it listed on Nasdaq. Now, at more than $2 a share, it's one of the most-traded stocks on the market.
Both Sirius XM and Pandora offer great music services (I use both and still own some shares of Sirius XM), but which one is the better stock bet?
The businesses
There's no question that each music service is popular. Sirius XM has more than 20 million paying subscribers, which is comparable with the body counts of Netflix and DirecTV. Meanwhile, Pandora boasts a staggering 90 million registered users.
But it's the monetization of these subs and users that matters for us investors. Because Pandora is mostly an ad-supported service, it's made only $167 million in sales over the past year. Sirius XM has done better, generating $2.9 billion. Believe it or not, that beats Netflix's top line. But all of these services pale in comparison with DirecTV's $24.8 billion.
Not surprisingly, Pandora's not profitable and Sirius XM is only becoming so, as it's been improving its cost structure after the 2008 merger between Sirius and XM.
Bottom line: It's much harder to get people to pay for music than it is something like cable TV. And the competition for each is only getting tougher.
The competition
In the music-delivery space, the competition is fierce. Sirius XM's satellite-radio offerings and Pandora's Internet radio offerings, though somewhat complementary, compete with each other for ears. Terrestrial radio (i.e., FM and AM stations) is still around. Other streaming services such as RealNetworks'
All this is to say that projections for the future are tough. So financial flexibility and valuation are especially important.
Financial flexibility and valuation
Coming off its IPO, Pandora has a net cash position. Sirius XM, on the other hand, still has a $2.7 billion net debt load, but that's down from $3.4 billion a year ago.
Of course, Sirius' newfound profitability helps increase financial flexibility.
In terms of valuation, P/E ratios aren't especially impressive. Yes, Sirius is profitable, but its trailing P/E ratio is in the triple digits. Meanwhile, Pandora sells for 18 times sales.
Better bet: Sirius XM or Pandora?
If the road ahead seems tough for both Sirius XM and Pandora, that's because it is. They have to fight in a difficult space for consumers who don't like paying for their tunes while trying to stave off content providers that do like getting paid.
Meanwhile, as investors, we're not getting any discounts for these difficulties. At these valuations, it's hard to make a bull case for either. But between the two, I think Sirius XM is the better bet because of its subscription model, the possibility of rate increases not far down the road, and the prospect of Sirius 2.0.
What do you think? Let us know in the comments box below.
