Why Spotify Might Demolish Sirius XM

May.21.14 | About: Sirius XM (SIRI)

Summary

Now that Spotify has already obtained half of Sirius' 21 million paying subscribers, Spotify has to be taken seriously.

Beyond Spotify's premium growth, customers are paying an average of $120 per year, or $1.2 billion in subscription revenue.

When you factor in the money it makes on the advertising side of the business, there is plenty to like here.

Shares of Sirius XM (NASDAQ:SIRI) closed down 2 cents, or half of 1% Tuesday to $3.17. Since the stock reached a near-term low of $2.98 several weeks ago, shares are up more than 6%. But on the year-to-date, Sirius has lost more than 9% of its value. The company continues to affirm the belief that there's never a dull moment in SIRI-Land. Note, I have a $3.50 price target on the stock. But I'm not opposed to changing that view at any moment.

To that end, I've become aware of the growing popularity of Spotify, whose chief executive Daniel Ek is, according to Forbes, the most important man in music. And he's only 30. His age was one of the reasons industry experts never really paid attention to Spotify's potential. Not to mention the growing popularity of Pandora (NYSE:P), which relegated Spotify to no more than a "neat idea." The company was never seen as a worthwhile challenge to Pandora's dominant Internet position, much less Sirius' premium subscriber dominance. That's all about to change.

On Wednesday, the young Swedish audio streaming service, which has enjoyed consecutive years of subscriber growth, released its 2014 numbers of active users, including paying subscribers. The company says it has now amassed more than 40 million active users worldwide.

This number still pales in comparison to Pandora, which just reported an active-listener count of 75.3 million, which is 3-times the active listeners of Sirius XM. But where it get interesting is in Spotify's premium subscription service, which the company said it has amassed roughly 10 million paying subscribers. So with both active users and paying subscribers growing at close to 70%, Spotify is now by-far the fastest-growing service in both categories - free and premium.

Recall, when analyst first had a glimpse into Spotify, which is a private company, management had revealed that it had only 24 million active users. And on the premium subscription front, its 6 million paying subscribers posed no real threat to Sirius. But now that it has already obtained half of Sirius' 21 million paying subscribers, Spotify has to be taken seriously.

All of this points to the growing global demand for music streaming. This is what has prompted Apple's (NASDAQ:AAPL) rumored $3.2 billion deal for Beats Electronics. Since this would be Apple's largest deal ever, the entire market was stunned to hear the details, which were first reported by the Financial Times. Beats, which also sells popular headphones, will give Apple the Spotify-like streaming service that Apple needs.

But the idea that Apple is willing to shell out a 60% premium for Beats, which according to Forbes is worth $2 billion, has raised questions about the valuation of other music companies. It has certainly raised the profile of Pandora, which is seen as the next logic acquisition target - particularly for a company like Google (NASDAQ:GOOG) (NASDAQ:GOOGL). This makes sense. But where does it leave Sirius XM, which, according to some is old technology?

What is clear is that Spotify is growing faster than anyone predicted. The company's recent numbers has yet to be digested by the broader media. But it's only a matter of time before the pieces are put together. In less than a few years, that the company has acquired half of Sirius' paying subscriber total can no longer be ignored. It also shouldn't be ignored that unlike Sirius, Spotify is a global company, which makes an acquisition by Apple and Google more likely.

The other thing is; beyond Spotify's premium growth, customers are paying an average of $120 per year, or $1.2 billion in subscription revenue. And when you factor in the money it makes on the advertising side of the business, there is plenty to like here. Sirius XM is not alone anymore.

Disclosure: I am long AAPL.

Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.