As one of Sirius XM Radio's
Shares of Sirius look expensive, with a P/E ratio north of 32. Ultimately, the company's success rides on its ability to gain new subscribers and retain old ones. Sirius closed 2011 with record subscriber growth -- welcoming 1.7 million new net subscribers for the year. Its recent deal with Toyota
Is it enough?
There is no shortage of risks tied to the fate of Sirius XM. Sirius relies on auto partnerships such as the Toyota contract to funnel in new paying customers. As my Foolish colleague Rick Munarriz points out, about half of its trial subscriptions translate into actual customers. This could work against Sirius, considering another slowdown in car sales would reverse its current subscriber growth.
True, it is the only reliable satellite-radio service available. But that doesn't mean it plays in a competition-free zone. Internet radio players such as Pandora Media
Despite claiming more than 125 million registered users, Pandora struggles to turn a profit. Ad revenue is the company's bread and butter, which means that unlike for Sirius, adding new users doesn't mean more sales for Pandora. Sirius is growing its online offerings by adding content such as full NASCAR coverage for subscribers who have Sirius XM Internet radio access -- although Internet streaming will cost you an extra $3 per month.
To buy or not to buy
From an investment standpoint, a company that charges customers to use its services (Sirius) is a much stronger business than one that offers its services for free (Pandora). Therefore, I don't see Pandora as a direct threat (yet) to Sirius. However, Sirius has a lot left to prove before I throw my cash behind it.
Investors who plan on buying Sirius solely on the share price should carefully consider the risks before committing.
Don't get me wrong: I love my satellite radio. While I'll gladly pay $14.49 each month for the service, I'm not yet ready to subscribe to the stock. Both Sirius and Pandora are volatile investments. If you're looking for a more investor-friendly opportunity, you'll find it in this free report from The Motley Fool titled "3 Stocks That Will Help You Retire Rich". Get instant access to three stocks that will help you build long-term wealth -- it's free.
Fool contributor Tamara Rutter owns no shares of any companies mentioned in this column. Follow her on Twitter, where she uses the handle @TamaraRutter, for more Foolish insights and investing tips. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.