Sirius XM Holdings Inc. (SIRI) and Spotify Technology S.A. (SPOT), two of the leading online music streaming companies, have been thriving because of increased usage OTT platforms by people locked in at home due to the COVID-19 pandemic.
These companies have seen a rise in music streaming subscriptions as more people upgraded to premium subscribers for a better experience.
While SPOT has gained 129.3% over the past nine months, SIRI has returned 2.6% over this period. Regarding six-month performance, SPOT is the clear winner with 77.7% gains versus SIRI’s 1.5% returns. But which of these stocks is a better pick now? Let’s take a look.
Latest Movements
On December 8th, SIRI announced a new agreement with Howard Stern under which Howard Stern’s audio and video archives will continue to be licensed to SIRI for the next seven years. This long-term partnership will help SIRI grow its audio platform domestically.
SIRI recently announced that Trimble RTX GNSS corrections are being transmitted through its satellite radio network for autonomous vehicles sold in the US and Canada. This alliance will help SIRI expand its operations by offering its hardware solutions to a wide variety of passenger vehicles.
On November 10th, SPOT announced a definitive agreement to acquire podcast technology leader Megaphone. The acquisition should help SPOT accelerate podcast monetization for advertisers and increase its user base.
Earlier this year, SPOT and Universal Music Group announced a new, multi-year global license agreement to develop new features that will deliver value to artists and great experiences to users. The collaboration will help SPOT strengthen its position in the industry.
Recent Financial Results
In the third quarter ended September 2020, SIRI’s subscriber revenue surged 2.4% year-over-year to $1.60 billion, primarily due to a rise in self-pay net subscribers. Net income rose 11% from the year-ago value to $272 million, while adjusted EBITDA increased slightly year-over-year to $661 million over this period.
SPOT’s premium revenue for the quarter ended September 2020 grew 15% year-over-year to $1.80 billion. A significant portion of the revenue increase came from its growth in the number of premium subscribers. Gross profit rose 10.8% from the year-ago value to $489 million over the period.
Here, SPOT is in an advantageous position.
Past and Expected Financial Performance
SIRI’s revenue grew 9.5% year-over-year. Also, the company’s EBITDA grew at a CAGR of 6.1% over the same period.
The market expects the company’s revenue to increase 0.2% in the current quarter, 1.7% in the current year, and 5.1% next year. SIRI’s EPS is expected to grow 20% in the current year, 12.5% next year and at a rate of 15.4% per annum over the next five years.
SPOT’s revenue grew 18.2% year-over-year.
The market expects the company’s revenue to increase 40.4% in the current quarter, 41% in the current year, and 22.3% next year. SPOT’s EPS is expected to grow 45.6% in the current quarter, 56.6% in the next year, and at a rate of 146% per annum over the next five years.
SPOT has an edge over SIRI here as well.
Profitability
SPOT’s trailing-12-month revenue is 1.12 times SIRI’s. But SIRI is more profitable, with a gross profit margin of 50.7% versus SPOT’s 25.3%.
Moreover, SIRI’s leveraged free cash flow margin of 14% compares favorably with SPOT’s 1%.
Valuation
In terms of trailing-12-month P/S, SPOT is currently trading at 6.97x, 90.4% more expensive than SIRI, which is currently trading at 3.66x. In terms of trailing-12-month price/cash flow SPOT’s 151.6x is 969.9% higher than SIRI’s 14.17x.
Though SPOT is more expensive than SIRI, its premium valuation is justified considering SPOT’s significantly higher earnings growth potential.
POWR Ratings
SPOT is rated “Strong Buy” in our proprietary POWR Ratings system, while SIRI is rated “Buy”. Here are how the four components of overall POWR Rating are graded for both SIRI and SPOT:
SIRI has an “A” for Trade Grade and Peer Grade, “B” for Buy & Hold Grade, and a “C” for Industry Rank. In the 11-stock Entertainment - Radio industry, it is ranked #2.
SPOT has an “A” for Trade Grade, Buy & Hold Grade and Peer Grade, and a “C” for Industry Rank. It is ranked #1 out of 11 stocks in the same group.
The Winner
While both SIRI and SPOT are good long-term investment bets considering their market dominance and continued expansion, SPOT appears to be a better buy based on the factors discussed here.
While SIRI is a relatively cheaper option, SPOT is a proven winner with its global brand recognition and high earnings growth potential.
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SIRI shares rose $0.02 (+0.31%) in after-hours trading Wednesday. Year-to-date, SIRI has declined -9.55%, versus a 15.61% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.
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