Sirius XM Holdings Inc. (SIRI) provides satellite radio services on a subscription fee basis in the United States. It broadcasts music, sports, entertainment, comedy, talk, news, traffic, and weather channels. On the other hand, Spotify Technology S.A. (SPOT) provides audio streaming services worldwide. It operates through Premium and Ad-Supported segments. The company offers sales, marketing, contract research and development, and customer support services.
Communication services have been in high demand due to the growing inclination toward social media and streaming. This trend is expected to continue with accelerated digitization and hybrid lifestyles. Moreover, with the continued expansion of the 5G network and governments’ infrastructure investments, the communication services sector is expected to witness exponential growth. According to a report by Research Nester, the global consumer communication services market is expected to grow at a CAGR of 4% by 2027. Therefore, both SIRI and SPOT should benefit.
SIRI has gained 1.5% over the past three months, while SPOT has negative returns. Also, SIRI’s 3.6% gains over the past year compared to SPOT’s negative returns. Moreover, SIRI is the clear winner with 7.2% gains versus SPOT’s negative returns in terms of the past six months’ performance.
But which of these two stocks is a better buy now? Let’s find out.
Latest Developments
On March 10, 2022, SIRI announced an exclusive distribution and sales agreement with reVolver Podcasts, the leading multicultural, audio-on-demand content creator and publisher. Mike Reid, Vice President of Multicultural at SXM Media, said, "By working with reVolver, we're thrilled to expand our offerings even further with an incredible lineup of multicultural programming that our audience and our advertisers are craving."
On November 11, 2021, SPOT acquired Findaway, a global leader in digital audiobook distribution. Gustav Söderström, SPOT’s Chief Research & Development Officer, said, "It is Spotify’s ambition to be the destination for all things audio, both for listeners and creators. The acquisition of Findaway will accelerate Spotify’s presence in the audiobook space and will help us more quickly meet that ambition."
Recent Financial Results
SIRI’s revenue increased 4% year-over-year to $2.28 billion for the fiscal fourth quarter ended December 31, 2021. The company’s adjusted EBITDA grew 1.8% year-over-year to $672 million, while its net income came in at $318 million compared to a loss of $677 million in the prior-year quarter. Also, its EPS came in at $0.08 compared to a loss of $0.16 in the year-ago period.
SPOT’s revenues increased 24% year-over-year to €2.69 billion ($2.95 billion) for the fiscal fourth quarter ended December 31, 2021. The company’s operating loss declined 89.9% year-over-year to €7 million ($7.68 million), while its net loss came in at €39 million ($42.78 million), representing 68.8% year-over-year decrease. Also, its loss per share came in at €0.21, down 68.2% year-over-year.
Past and Expected Financial Performance
SIRI’s revenue and total assets grew at CAGRs of 14.7% and 7.9%, respectively, over the past three years. Analysts expect SIRI’s revenue to increase 7% for the quarter ending March 31, 2022, and 3.4% in fiscal 2022. The company’s EPS is expected to grow 60% for the quarter ending March 31, 2022, and 12.5% in fiscal 2023. Moreover, its EPS is expected to grow at a rate of 9.8% per annum over the next five years.
On the other hand, SPOT’s revenue and total assets grew at CAGRs of 22.5% and 18.3%, respectively, over the past three years. The company’s revenue is expected to increase 11.8% for the quarter ending March 31, 2022, and 20.4% in fiscal 2022. Its EPS is expected to grow 26.7% for the quarter ending March 31, 2022, and 807.1% in fiscal 2023. Also, SPOT’s EPS is expected to increase at a rate of 137.8% per annum over the next five years.
Profitability
SPOT’s trailing-12-month revenue is 1.26 times what SIRI generates. However, SIRI is more profitable with a gross profit margin and EBITDA margin of 50.63% and 29.53% compared to SPOT’s 26.80% and 1.60%, respectively.
However, SIRI’s ROA and ROTC of 12.34% and 19.13% are higher than SPOT’s 0.89% and 1.63%, respectively.
Valuation
In terms of forward non-GAAP P/E, SPOT is currently trading at 97.63x, 489.2% higher than SIRI’s 16.57x. Moreover, SPOT’s forward EV/EBITDA ratio of 97.73x is 723.3% higher than SIRI’s 11.87x.
So, SIRI is relatively affordable here.
POWR Ratings
SIRI has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, SPOT has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
SIRI has a B grade for Stability, in sync with its beta of 0.96. In comparison, SPOT has a C grade for Stability, consistent with its beta of 1.69.
Moreover, SIRI has a grade of B for Quality. This is justified given SIRI's 19.13% trailing-12-month ROTC, 402.5% higher than the industry average of 3.81%. On the other hand, SPOT has a Quality grade of C, in sync with its 1.63% trailing-12-month ROTC, 57.2% lower than the industry average of 3.81%.
Of the six stocks in the A-rated Entertainment - Radio industry, SIRI is ranked second. However, SPOT is ranked last.
Beyond what I’ve stated above, we have also rated the stocks for Growth, Momentum, Value, and Sentiment. Click here to view all the SIRI ratings. Also, get all the SPOT ratings here.
The Winner
Rapidly changing lifestyles and the adoption of advanced technologies should drive the communication services industry’s growth this year and beyond. While both SIRI and SPOT are expected to gain, it is better to bet on SIRI now because of its robust financials, lower valuation, and higher profit margin.
Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Entertainment - Radio industry here.
SPOT shares rose $0.21 (+0.16%) in after-hours trading Wednesday. Year-to-date, SPOT has declined -42.92%, versus a -8.28% rise in the benchmark S&P 500 index during the same period.
About the Author: Nimesh Jaiswal
Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.
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