Is Sirius XM Holdings Inc. Topping Out?

After reporting revenue that exceeded expectations and earnings that fell in line with estimates, shares of Sirius barely responded. Is this a sign that the business is finally starting to peak and that Pandora could become investor's new favorite radio stock?

Daniel Jones
Daniel Jones
Apr 27, 2014 at 11:00AM
Consumer Goods

Source: Sirius XM Holdings

In spite of reporting higher revenue and earnings that were in line with analyst expectations on April 24, Mr. Market refused to reward Sirius XM Holdings (NASDAQ:SIRI) shareholders much, sending the shares up less than 1%. Is this a sign that the company's share price has finally peaked and that investors should look to Pandora Media (NYSE:P) for gains, or does Sirius still have plenty of room to run?

Sirius beat on revenue but failed surprise on earnings

Source: Sirius XM Holdings

For the quarter, Sirius reported revenue of $997.7 million. This represents a slight beat over the $994.6 million analysts expected to see but was 11% higher than the $897.4 million the company reported the same quarter last year. According to the company's earnings release, the main driver behind its increase in sales was a larger subscriber base.

During the quarter, Sirius added 266,799 listeners, bringing its total listener base to 25.8 million. This is 6% above the level management reported a year ago and shows that Sirius is still capable of growth in spite of its already-large user base. Perhaps more impressive was the number of subscribers who pay for Sirius. Over the past year, this number ticked up 7% to 21.3 million, which means that a larger percentage of its listener base is sticking with and paying for the service.

In terms of revenue, Sirius gave investors a pleasant surprise, but the company could not do the same from a profitability perspective. For the quarter, the company reported earnings per share of $0.02. Although this may not seem all that impressive, it should be noted that the company's earnings fell in line with estimates and matched what management reported last year.

Source: Sirius XM Holdings

Unfortunately, there is some downside to the results reported by management. Its level earnings came at a time when revenue rose but net income dropped 24% from $123.6 million to $94 million. The main driver behind the company's declining profits was a combination of its revenue share and royalties rising from 16.6% of sales to 19.6% and a $27 million loss incurred from derivatives contracts. On a per share basis, these negative developments were offset by a 6.5% reduction in share count.

Growing competition from Pandora
Over the past four years, Sirius has seen its revenue increase at an impressive rate. Between 2010 and 2013, the company's top line expanded by 35% from $2.8 billion to $3.8 billion. According to the company's annual reports, the largest contributor to its rise in sales was subscriber count, which rose 27% from 20.2 million in 2010 to 25.6 million in 2013.

SIRI Revenue (Annual) Chart

SIRI Revenue (Annual) data by YCharts

While there's no denying that Sirius's growth has been attractive, it pales in comparison to Pandora's revenue growth. Over the same four-year period, Pandora saw its revenue skyrocket 336% from $137.8 million to $600.2 million. Like Sirius, Pandora saw its revenue rise because of an increase in users but Pandora's user growth expanded more rapidly, jumping 150% from 80 million to 200 million.

Based on these numbers alone, investors might think that Pandora is clearly better, but that may not necessarily be true. Yes, the company does have a larger listener count, but a smaller percentage of these pay for the company's service than in the case of Sirius. To understand the difference between these two companies, the Foolish investor needs to examine the profitability of each.

SIRI Net Income (Annual) Chart

SIRI Net Income (Annual) data by YCharts

In the case of Sirius, the Foolish investor can see that the company has been quite profitable. Between 2010 and 2013, the business saw its net income climb 776% from $43.1 million to $377.2 million, while Pandora clocked in a net loss that widened from $11 million to $27 million. This suggests that Sirius has chosen to grow at a slower pace than its peer but in such a way that it can not only turn a profit, but increase that profit over time. Pandora, on the other hand, looks to be more interested in growth irrespective of what that means for its bottom line.

Foolish takeaway
Based on the data provided, it looks like Sirius had a decent quarter but investors need to keep an eye on its net income to see if management can generate higher profits moving forward. Over the long run, the company has the potential to continue its growth, but with just 6% subscriber growth over the past year, it's beginning to look like Sirius's upside is somewhat capped.

Now, this doesn't mean that Pandora's a slam-dunk, but the business looks more interesting than Sirius at this point. On top of growing at a much quicker rate than Sirius, the business has a larger listener base it can eventually tap into to generate revenue. However, no company can generate losses in perpetuity. If Pandora is unable to turn its larger base and quick growth into a profit, its investors will eventually get fed up with the business.