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Sunday, July 10, 2011

Buy Sirius XM or Pandora ? Sirius XM Radio (Nasdaq: SIRI ) and Pandora Media (NYSE: P )

Music slingers Sirius XM Radio (Nasdaq: SIRI ) and Pandora Media (NYSE: P ) are both pretty hot right now. Pandora's fresh off its June IPO, and Sirius XM has been pumping out good news ever since it re-signed Howard Stern.




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.

Sirius TTR1 Tabletop Internet Radio (Black)

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' (Nasdaq: RNWK ) Rhapsody are in the mix, too, as is Apple's (Nasdaq: AAPL ) iTunes, now beefed up with free online storage on the iCloud. Amazon.com (Nasdaq: AMZN ) and Google (Nasdaq: GOOG ) have also rolled out online storage solutions. And the vague looming threat of Facebook lingers in the air. We could go on.



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.
First, while Pandora is indeed, music, Sirius is music, news channels, talk, major city road conditions, comedy, and more. Go to Sirius.com to see their channel line up.




Second, while Pandora controls the intellectual property and infrastructure that allows music to be queued to you, it doesn't own or control the transmission infrastructure; and is dependent on compatible apps installed on smart phones, computers and so on. It's also dependent on subscribers' data subscription plans. In other words, there are multiple players involved in the end to end link. Sirius' major revenue source, on the other hand, is based on infrastructure and intellectual property owned or controlled along the entire pathway from studio to receiver; and is not dependent on others to enable subscriber access to content. This gives Sirius the ability to manage/adapt/enhance offerings in a way that Pandora can't.



Thirdly, Sirius has mutually beneficial agreements with all the major auto manufacturers; Pandora is only marginally integrated into one or two auto lines.



Fourth, as you have noted, Sirius is making money, paying down debt, increasing free cash flow, and on a net basis, increasing paying subscribers. Can't say that about Pandora; nor can I see, given Pandora's revenue model, any pathway to profitabiity. These are reasons why Pandora's initial analyst recommendation was sell with a price point of $5; and Sirius analysts have increasingly issued buy recommendations.



Fifth: There appears to be a significant demographic difference between between the two communities of subscribers; Pandora's being younger (and perhaps, presumably with less discretionary income); and Sirius' older with presumably greater discretionary income.



Sixth: The methods of counting subscribers is wholly different. While there is much more to it, the simplified version is that Pandora counts somebody who logged in and listened to music sometime in the last 60 days as a subscriber. Sirius counts a subscriber as somebody who has paid for an account.



Seventh: Liberty Media owns convertable preferred stock worth about 40% of Sirius. The possibilities of content and other integration between Sirius and Liberty are significant.



There's more, and I know that no matter what might be said, there will be those who will disagree. The point, though, is that the two companies are not two sides of the same coin.






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
both of these companies will face a challenge in the upcoming months but as Sirius is put in front of more and more used car buyers i think they will reap the rewards of new subscribers. I am not sure a rate hike is going to be all that successful unless they implement it on new customers and allow old ones to stay at their current rates. I would think about dropping the service if they raised it to around $150 a year.


Now, SIRI EV/Sales = 16.8B / 2.9 = 5.79 multiple.




Compare that with Pandora at 18 multiple and you tell me if Sirius still looks "in the triple" digits with you fuzzy math. Siriusly, you can fool ppl who are not skilled in finance and M&A, but you look like a fool (no pun intended) to ppl who do know how to value a firm. SiriusXM is a $3 stock by the end of this year.

This is one place where I see Sirius having a big advantage. It has great original programming, whether it's Stern, sports talk, or B.B. King's weekly show on the blues channel, it's stuff you cannot get anywhere else.




I sold out of my SIRI position a while back, but I still love the service. Best $10 I spend every month.







My prediction is you will see the stock price for SIRI go up to around 2.60 prior to conference call on Aug 8. The downside to this stock increase is that unless the call announces some unexpected positive news the stock will sell off back to the 2.20's. I cant wait for Siri 2.0 and hope it is all that the company has let the public make it out to be.



I am long SIRI



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