Buy Sirius XM, Sell Pandora


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Folks have been writing off Sirius XM Radio (SIRI) for years. "It's too expensive," some will argue. "Why pay for radio?" others say. "Howard Stern is repulsive," your mother says -- even though she's never actually heard his show.

Well, just as cable and satellite television providers have weaned couch potatoes off their rabbit ears, Sirius XM has steadily boosted its audience to 21 million subscribers.

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Sure, Pandora (P) is flashier, and the popular music-discovery site is growing faster than its peer: Last month it announced that it had crossed the meaty mark of 100 million registered users. There's an important asterisk in that statement: That is a cumulative figure. There are actually 36 million active monthly users.

Pandora's meatier base of active users is largely a collection of music-streaming freeloaders. Only a sliver of Pandora's listeners actually pay a premium for the commercial-free and fuller-featured version of the streaming service. Most of Sirius XM's accounts, on the other hand, are self-paying customers that relish coast-to-coast programming in their cars.

That's why, when it comes to investing, Sirius XM is the stock worth owning.

Do You Hear a Cash Register Ringing?

Pandora's recent IPO was an initial hit because the company is at the forefront of the dashboard convergence revolution. Smartphone owners can now seamlessly stream Pandora through their car speakers on many new models, giving them new audio alternatives beyond satellite and terrestrial radio for fresh programming.

Sirius XM critics that have labeled satellite radio as a transitory technology -- something to bridge the gap between terrestrial radio and server-served streams. But they are missing the point.

Internet radio is a bad business model, where unpopular advertising revenue isn't enough to cover music royalties, bandwidth tabs, and essential operating costs. Pandora's still losing a ton of money, and that's not going to change in the near term.

Sirius XM has been profitable through most of the past year. Some may argue that Sirius XM isn't exactly cheap trading for 27 times next year's projected profitability, but at least it's in the black and moving in the right direction.

Pandora's a Pricey Ticket

I don't think Pandora is doomed. It's just expensive, even now that it has fallen well below its earlier $16 IPO price. It will take some time for advertisers to pay more in the pursuit of reaching streaming audiences, and that's the one thing keeping this scalable model back from profitability.

Sirius XM is already there. It's widening its margins and things should improve there when Sirius XM finally initiates a rate hike early next year.

I'll stick with Sirius XM.

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Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool has a disclosure policy we take way seriously.

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