Why Sirius Shares Are A Bargain Compared To Pandora

| About: Sirius XM (SIRI)

Sirius XM Radio (NASDAQ:SIRI) shares have been doing well recently. The stock is up 22.5% in 2012 and 31.2% in the last six months. After the company spent years on the brink of bankruptcy with a lack in investor confidence (it was bailed out by 1 private investor), Sirius is now profitable and it looks like it will continue to be profitable for the next couple of years.

Now the question is if Sirius shares will continue to rise in price in the coming months or if investors have missed the boat. In this article, I supply some insight on why compared to Pandora (NYSE:P), Sirius XM is still a great buy.

There is good news and bad news facing Sirius XM in the near future. The bad news addresses Sirius XM's place not in the near future, but in the distant future. As mobile internet becomes more common and speeds up, the lines between satellite radio and internet radio will begin to blur. As this happens, the costs associated with Sirius XM's business structure can possibly weigh the company down compared to its internet competitors.

The good news is that Sirius is still a good value compared to internet radio competitors. Sirius is expected to earn 7 cents per share in 2012 and 10 cents per share in 2013 and traded for $2.23 at the close of trading on February 27th. Pandora is expected to break even in its fiscal year ending January 2013 and potentially be profitable in January 2014, but has no track record of profitability. With this much weaker earnings outlook, Pandora currently trades $12.87, or 477 percent more than Sirius, with MUCH worse per share numbers. In addition, Pandora trades at 7.55 times revenue while Sirius trades at 3.05 times revenue and Pandora only has about one more year of unusual growth.

There are two big differences between Sirius XM and Pandora other than their delivery methods: their revenue sources and their programming. Sirius XM is commercial free and makes its money off of subscriptions while Pandora has a subscription service, but makes most of its revenue off advertisements from free users. Pandora currently plays only music that is "tailor made" for users while Sirius XM has original programming and stations. I believe that each company has the potential to copy the other's content over a six month span, and it will be interesting to see if either changes its business model in the next couple of years.

The fact of the matter is internet radio will begin to prey on Sirius XM, but the question is how much. Sirius XM has shown that it can adapt to the internet delivery method with its apps and how subscribers can listen online. For how much lower Sirius is priced than Pandora, it is a much better buy considering its recent profitability and ability to more easily adapt to Pandora's business model while Pandora would struggle implementing a satellite delivery method. Investors in Sirius just have to hope that both stocks aren't incredibly overvalued, but they should be able to reap the benefits of SIRI's upward trend in the near future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.