Better Buy for 2022: Spotify vs. Sirius XM Holdings

Spotify Technology S.A. (SPOT) and Sirius XM Holdings Inc. (SIRI) are two prominent providers of audio entertainment services. Based in Luxembourg, SPOT provides audio streaming services worldwide and operates through Premium and Ad-Supported segments. The company also offers sales, marketing, contract research and development, and customer support services. In comparison, New York City-based SIRI provides satellite and online radio services on a subscription-fee basis, broadcasting music, sports, entertainment, comedy, talk, news, traffic, and weather channels. It distributes satellite radios through automakers and retailers and its website.

The expanding monthly active user base for audio streaming services like podcasts, audiobooks, radio, talk shows, and music has been driving the industry’s growth. Nearly 60% of U.S. consumers aged 12 years or older listened to podcasts in 2021. The introduction of captivating content and rising demand for 3D audio technology brightens the industry’s prospects. So, both SIRI and SPOT should benefit in the coming months.

While SPOT’s shares have declined 31.1% over the past month, SIRI has surged 2.1%. SIRI is also a clear winner with 10% gains versus SPOT’s negative returns over the past nine months. But which of these stocks is a better pick now? Let’s find out.

Latest Developments

On Nov. 11, 2021, SPOT agreed to acquire Findaway, a global leader in digital audiobook distribution. Findaway’s technology infrastructure will accelerate SPOT’s entry into the rapidly growing audiobooks industry, enable it to scale its audiobook catalog quickly, and deliver an enhanced user experience while simultaneously providing new avenues for publishers, authors, and independent creators to reach new audiences around the globe.

On Jan. 31, 2022, SIRI’s SXM Media announced the introduction of AudioID powered by AdsWizz, a leading global digital audio advertising solution provider. With an algorithm that matches a variety of listener signals and inputs, this new identity solution responds to ad requests by finding or creating unique, anonymized AudioIDs, which can then be tapped into frequency capping, advanced first party targeting, enhanced measurement, and more. This listener identity will power the next generation of audio advertising.

Recent Financial Results

For its fiscal 2021 fourth quarter, ended Dec. 31, 2021, SPOT’s revenue increased 24% year-over-year to €2.69 billion ($3.04 billion). The company’s gross profit came in at €712 million ($805.65 million), up 23.8% from the prior-year period. Its operating income came in at €7 million ($7.92 million), representing an 89.9% decline from the year-ago period. SPOT’s net loss was €39 million ($44.13 million), indicating a 68.8% year-over-year decline. Its loss per share decreased 68.2% year-over-year at €0.21. The company had €2.74 billion ($3.10 billion) in cash and cash equivalents as of Dec. 31, 2021.

SIRI’s total revenues for its fiscal 2021 third quarter, ended Dec. 31, 2021, increased 4.3% year-over-year to $2.28 billion. The company’s income from operations came in at $476 million, versus a $503 million loss in the year-ago period. Its net income came in at $318 million for the quarter compared to a $677 million loss in the prior-year period. SIRI’s EPS was  $0.08, versus a $0.16 loss per share in the year-ago period. As of Dec. 31, 2021, the company had $191 million in cash and cash equivalents.

Past and Expected Financial Performance

SPOT’s revenue and total assets have increased at CAGRs of 22.5% and 18.3%, respectively, over the past three years. And the company’s levered free cash flow has grown  at a 22.5% CAGR over the past three years.

Analysts expect SPOT’s EPS to rise 114.4% year-over-year in its fiscal year 2022, ended Dec. 31, 2022, and 647.1% in fiscal 2023. Its revenue is expected to grow 19.8% year-over-year in fiscal 2022 and 16.8% in fiscal 2023. The company’s EPS is expected to grow at a 137.8% per annum rate over the next five years.

In comparison, SIRI’s revenue and total assets have grown at CAGRs of 14.7% and 7.9%, respectively, over the past three years. And the  company’s levered free cash flow has grown at 6.4% CAGR over the past three years.

SIRI’s EPS is expected to rise 0.5% year-over-year in fiscal 2022, ended December 31, 2022, and 11.5% in fiscal 2023. Its revenue is expected to grow 3.4% year-over-year in fiscal 2022 and 4.3% in fiscal 2023. And analysts expect the company’s EPS to grow at a 9.8% rate per annum over the next five years.

Valuation

In terms of non-GAAP P/E for the next fiscal year, SPOT is currently trading at 123.65x, which is 648.9% higher than SIRI’s 16.51x. And in terms of forward EV/EBITDA, SIRI’s 11.95x compares with SPOT’s 136.17x

Profitability

SPOT’s trailing-12-month revenue is almost 1.3 times SIRI’s. However, SIRI is more profitable, with a 15.1% net income margin versus SPOT’s negative value.

Furthermore, SIRI’s 12.3% and 19.1% respective ROA and ROTC compare favorably with SPOT’s 0.9% and 1.6%.

POWR Ratings

While SIRI has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, SPOT has an overall C grade, which equates to a Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

SIRI has a B grade for Stability, which is in sync with its lower volatility versus the broader market. SIRI has a 0.97 beta. SPOT’s C grade for Stability reflects its higher volatility. SPOT has a 1.63 beta value.

SIRI has a B grade for Quality, which is consistent with its higher-than-industry profitability ratios. SIRI’s 29.5% trailing-12-month EBITDA margin is 41.4% higher than the 20.9% industry average. And SPOT’s C grade for Quality is in sync with its lower-than-industry profitability ratios. SPOT has a 1.6% trailing-12-month EBITDA margin, which is 92.3% lower than the 20.9% industry average.

Of the four stocks in the B-rated Entertainment - Radio industry, SIRI is ranked #1, while SPOT is ranked #4.

Beyond what we have stated above, our POWR Ratings system has also rated SIRI and SPOT for Growth, Sentiment, Momentum, and Value. Get all SIRI ratings here. Also, click here to see the additional POWR Ratings for SPOT.

The Winner

Growing consumer interest in audio entertainment content should benefit both SIRI and SPOT in the coming months. However, we think its higher profitability and relatively lower valuation make SIRI a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Entertainment - Radio industry.

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