Sizing up these two audio entertainment companies isn't as easy as picking your favorite song.
Shares of Sirius XM Holdings (NASDAQ: SIRI) have beaten the broader market with a return of 77% over the past five years. And the company just acquired Pandora, which makes Sirius XM the leader in audio entertainment in North America with over 100 million monthly active users.
On the other side of this matchup, Spotify Technology (NYSE: SPOT) is on a mission to dominate the globe. It has 217 million monthly active users worldwide and is growing fast. However, since its IPO last year, the stock's price is down 15% as investors wrestle with the company's lack of profitability.
Let's compare both companies to determine which stock is the better buy today.
The case for Sirius XM
Sirius has a relationship with every major automaker, which drives most of the sales of the satellite radio service. The company says most automakers provide a trial Sirius XM subscription to new-vehicle buyers. And once people have access to the service, it can be hard to give up. The company boasts 34.2 million subscribers, with a low churn rate of just 1.8% from self-pay members in the first quarter.
Sirius has a vast selection of content including comedy, talk show, news, sports, and music -- and some of the content is exclusive to Sirius XM. In recent years, the company has made its offerings even stickier by offering additional services, such as roadside assistance and vehicle health monitoring, all of which stems from Sirius' acquisition of Automatic Labs in 2017.
Sirius is also launching 360L, a new user interface that integrates its satellite radio and internet streaming service in one in-vehicle entertainment platform. This is set to debut in the new 2020 Cadillac ST6 and will expand to a wide range of General Motors' 2020 models later this summer.
Additionally, the company recently acquired Pandora, providing several benefits for Sirius. In addition to picking up Pandora's 66 million monthly active users, the deal should provide the combined company cost savings, cross-promotional opportunities, and integration of Pandora's recommendation technology, as well as Pandora's ad-supported service. The deal enormously enhances Sirius XM's scale and streaming capabilities to deliver growth for shareholders.
Over the last year, revenue increased 10% to $6.14 billion. Sirius XM's top-line expansion pales in comparison to Spotify's trailing-12-month growth of 40%, but where Sirius lacks growth, it makes up for that with consistent profitability.
Over the last year, Sirius XM generated a profit of $1.05 billion and expects to generate $1.6 billion in free cash flow in 2019. That works out to a forward price-to-free-cash-flow ratio of about 16, which looks attractive given the company's double-digit growth in revenue.
The case for Spotify
On the other side, Spotify hasn't reported a profit but generated $358 million in free cash flow over the last year. Spotify's subscriber base grew 32% year over year during Q1 to reach 100 million. It's one of the top music-streaming services in the world, with 217 million monthly active users through the end of the first quarter.
Spotify's success is based on ubiquity and offering a growing selection of music. The service is accessible on game consoles, smartwatches, cars, smart speakers, and Google Home products.
Spotify recently made a deal to expand its partnership with Samsung Electronics to pre-install the Spotify app on Samsung's S10 family of phones. Last year, the two companies joined forces to put Spotify on Samsung smart speakers, which could be viewed as an effort by both companies to counter the growth of Apple Music.
The new agreement with Samsung comes amid reports that Apple Music has surpassed Spotify in premium subscribers in the U.S. This might sound worrisome for Spotify, but keep in mind, the music-streaming market is large enough for more than one provider to succeed. The market is expected to grow at a compound rate of 17.9% per year over the next six years, according to Absolute Market Insights.
Additionally, Spotify is continuing its mission to dominate the globe by launching in India in the first quarter, where the service already has 2 million users. In total, Spotify is in 79 markets, but management sees the potential for much more growth. The company's long-term goal is to connect over 1 billion users with millions of artists.
The company sees itself as much more than a music service. To further push its lead in audio streaming, Spotify is beginning to pursue the podcast market with the acquisitions of Parcast, Gimlet, and Anchor, which management calls "three best-in-class" podcasting companies. This is part of Spotify's mission to become the world's largest audio platform.
Which is the better buy?
Sirius XM wins when it comes to profitability, but Spotify scores two points: one for growth and another for having, potentially, a much larger addressable market.
Spotify also scores a point against Sirius XM on financial fortitude. Sirius has $7.2 billion in debt and very little cash, which looks weak compared to Spotify's $3.9 billion in cash and investments and no debt.
Spotify's P/FCF ratio is high at 67, but its free cash flow soared 121% over the last year. Sirius XM has a lower valuation, but it's also growing slower.
Looking at the price-to-sales metric, Spotify is cheaper, with a forward P/S of 3.12 based on sales estimates for 2019, compared to Sirius XM's higher multiple of 3.37 times sales.
Comparing these two stocks on growth, financial strength, market opportunity, and valuation, I believe Spotify is the better buy for investors today.
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John Ballard has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AAPL and Sirius XM Radio. The Motley Fool has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool has a disclosure policy.