Is It Time to Get Sirius?

Sirius XM is an enigma to many investors. Both the bulls and bears have valid points about the stock. Let's take a look at both sides of the argument, then determine if Sirius is likely to present a better long-term investing opportunity than Cumulus Media and/or Pandora Media .

Reasons to be bullish
In the third quarter, Sirius saw subscriber revenue increase 10% year over year. During the first nine months of the year, subscriber revenue increased an even more impressive 11%. Additionally, Sirius expects subscriber revenue to continue to grow, thanks to successful promotions and subscription plan mix. For the full year, Sirius expects total net subscriber additions of approximately 1.6 million, up from the previously expected 1.5 million. 

So far this year, increases in premium services -- data services, premium channels, and Internet streaming -- have helped drive the top line. However, promotions have been necessary for acquisition and retention purposes. Sirius also purchased Agero for $530,000. Agero offers two-way wireless connectivity in safety, security, convenience, maintenance, data services, and vehicle diagnostics. This deal seems to be worthwhile because the cost is manageable, which makes upside potential greater than downside risk. Ultimately, it has the potential to give Sirius more diversification. 

Speaking of diversification, Sirius has added two new features: Sirius XM On Demand and MySXM, which allows users to access their favorite content on the Internet and via apps on mobile devices. So, what could possibly go wrong?

Reasons to be bearish
An examination of Sirius' 10-Q reveals an extensive list of potential dangers and future challenges. The first concern that stood out was rather basic, but that doesn't take away from its power: Sirius is now seeing substantial competition, and that competition is likely to increase over time.

The business is also largely dependent on automakers. This is obvious to Sirius investors. But interest rates won't remain at historic lows forever. When interest rates eventually increase, the auto market may fade. The Sirius 10-Q also states, "Our ability to attract and retain subscribers at a profitable level in the future is uncertain." No further explanation necessary here.

The 10-Q also points out that royalties for music rights have increased, and that this trend is also likely to continue. Other concerns include advancing technologies and industry changes that could impact services, as well as the potential for the company's debt to adversely effect future operations.

Leaving only hope within
Pandora isn't a direct competitor to Sirius. It offers Internet radio services, whereas Sirius offers satellite radio services. Pandora also only operates in the United States, while Sirius operates in the United States and Canada. Another key difference is that Pandora relies on advertising for revenue growth, and Sirius relies primarily on subscriptions. However, they're both fast-growing radio-based companies.  

In mythology, Pandora disobeyed Zeus by opening the box, which then released all evils onto mankind. The only thing left in the box was hope. If you're not following the allegory, consider that Pandora Media is trading at 109 times forward earnings while sporting a negative profit margin of 9.26%. Sirius has been around for 23 years, has securely established its presence, and sports a profit margin of 12.69%. On the other hand, Pandora's top-line growth is phenomenal. Consider its top-line performance over the past five years:

SIRI Revenue (TTM) Chart

SIRI Revenue (TTM) data by YCharts.

Pandora recently reported October numbers (all year over year):

  • Listening hours: Up 18% to 1.47 billion
  • Share of U.S. radio audience: 8.06% (6.61% in the year-ago quarter)
  • Active listeners: Up 20% to 70.9 million

Those are strong numbers, and it looks like the launch of Apple iTunes Radio hasn't crushed Pandora, as many expected. Nobody knows how this competition will play out, but it's certainly a credible threat to Pandora.

A more basic approach
Those who want to invest in commercial radio might consider Cumulus Media, which generates revenue through advertisements on its 517 stations throughout 108 media markets in the U.S. In the company's third quarter, net revenue increased 2.1% year over year. Chairman and CEO Lew Dickey stated that the company's core business continued to take share, and that this trend is continuing in the fourth quarter.

In its recent third quarter, Cumulus has seen strong revenue increases in local sports advertising ($4.6 million), national advertising ($2.1 million), live entertainment ($1.3 million), and added stations with Bloomington and Peoria, Illinois ($0.9 million). Conversely, political revenue has slid $2.9 million.

Cumulus is trading at just 16 times forward earnings. However, Cumulus' profit margin of negative 5.48%, and its debt-to-equity ratio of 10.02, are concerning.

The bottom line
Pandora is growing at a rapid rate, which means there's always potential. And the stock continues to run higher. However, based on a lack of profitability, increased competition, and a lofty valuation, it looks to be a dangerous investment. Cumulus has turned the corner, but investing in one of the most leveraged companies throughout the broader market is rarely a good long-term strategy. Sirius is far from the safest investment you will find, but it offers growth potential and is more fundamentally sound than Pandora and Cumulus. 

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Fool contributor Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Apple and Pandora Media. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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