Next-gen radio companies Pandora Media (NYSE: P) and Sirius XM (NASDAQ: SIRI) saw their stocks go in opposite directions over the past 12 months. Pandora, one of the top internet radio companies in the US, shed more than 60% of its market value. Yet Sirius XM, the country's leading satellite radio provider, rallied nearly 20%.
Contrarian investors might be wondering if Pandora can recover after that rout. Pandora might not be down for the count yet, but I think Sirius is still the better radio stock, for four simple reasons.
1. Fewer direct competitors
Pandora had a first mover's advantage in the streaming radio market, but the industry is now crowded with tough competitors like Spotify, Apple (NASDAQ: AAPL) Music, and Amazon (NASDAQ: AMZN) Music. All of these rivals have distinct advantages against Pandora.
Spotify has a much larger base of subscribers than Pandora (60 million vs. 5.2 million), enabling it to rely on steady subscription revenues instead of volatile ad sales. Spotify also has a presence in 61 countries or regions, while Pandora only serves the US after exiting from Australia and New Zealand last year.
Meanwhile, competitors like Apple and Amazon can afford to take losses on streaming music to expand their ecosystems. Apple tethers Apple Music users to its iTunes and iOS ecosystems, while Amazon Music locks users into Prime memberships.
Sirius XM -- which was formed from the merger of Sirius and XM, the two biggest satellite radio companies in the US -- doesn't face much competition with over 32 million subscribers. The only direct competition Sirius XM faces is from free AM/FM radio, which is arguably a softer opponent than streaming powerhouses like Spotify and Apple.
2. Better support from major automakers
Sirius XM has stayed relevant with the help of major US automakers, which bundle its trial service with new vehicles. Sirius' core subscriber base consists of customers who continue paying about $11-$16 per month for ad-free radio with curated content.
Sirius XM is also available as a streaming service on mobile devices, but that business hasn't gained much ground against market leaders Pandora and Spotify. That's why Sirius XM tried to buy Pandora last year, but eventually settled on a 19% stake for $480 million.
Many major automakers also added support for Pandora over the past few years. However, the service is usually streamed from an external mobile device, and most automakers aren't bundling free Pandora trials with new vehicles.
3. Better revenue and user growth
Pandora's revenue rose 8% annually to $378.6 million last quarter, which missed analyst expectations by $1.9 million. Its subscription revenue rose 50% to $84.4 million, but that growth was throttled down by its ad revenues, which inched up 1% to $275.7 million, and its ticketing revenues, which fell 16% to $18.5 million.
Pandora reached 73.7 million active listeners (excluding 1.1 million left behind in Australia and New Zealand), compared to 77.9 million in the prior-year quarter. Paid subscribers accounted for just 7% of Pandora's active listener base, leaving it heavily dependent on its stagnant ad business. Analysts expect Pandora's revenue to rise about 5% this year.
Sirius' revenue rose 8% annually to $1.38 billion last quarter, beating expectations by about $10 million. Its subscription revenues rose 6% to $1.14 billion, ad revenues rose 21% to $41.5 million, and equipment revenues grew 3% to $32.3 million.
Sirius' total subscribers reached 32.2 million, up from just under 31 million a year earlier. Those growth figures aren't explosive, but they're certainly more balanced and steadier than Pandora's. Analysts expect Sirius' revenue to rise 8% this year.
4. Better profitability
Sirius also crushes Pandora in terms of profitability. Sirius' net income surged 42% annually to $276 million last quarter, its EBITDA rose 12% to $551 million, and its diluted EPS jumped 49% to $0.06, beating estimates by two cents. Wall Street expects its earnings to rise 19% this year.
Pandora reported a GAAP net loss of $66.2 million last quarter, compared to a loss of $61.5 million a year earlier. However, its EBITDA improved from -$6.6 million to -$5.3 million, while its non-GAAP loss of $0.06 per share beat estimates by two cents. Unfortunately, analysts don't expect Pandora to achieve profitability (by GAAP or non-GAAP measures) anytime soon.
Sirius is more profitable for a simple reason -- its higher subscriber revenues can offset rising content licensing costs. Pandora, which relies heavily on ads, simply can't offset those expenses, which gobbled up 54% of its revenues last quarter.
The key takeaways
Pandora might look tempting at 0.8 times sales, but it's cheap for a reason. It's trying to counter its streaming rivals and grow its subscriber base, but it's fighting losing battles on both fronts as it loses active listeners and remains deeply unprofitable.
Meanwhile, Sirius XM offers better user growth and higher profits while facing much less competition. That's why it's clearly the better radio stock to own for 2018.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon, Apple, and Pandora Media. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.