With Sirius XM (SIRI) trading at a multiple of 26.4x, it is easy to draw a comparison to Netflix (NFLX). But the fundamentals differ drastically. Whereas Sirius has a sustainable monopoly, Netflix is precariously operating in an industry with virtually no barriers to entry. Radio will always be open and non-rival, but Sirius has the talent and brand necessary to expand into other segments.
The major media titans of today have diversified across mediums ranging from movies to online gaming and radio. Netflix is trying to thrive in the logical direction of video watching (ie. streaming) but has proven to lack the brand capable of limiting churn. Sirius' recent price hike has proved to be a litmus test confirming the company's excellent value. Going forward, there are several reasons to remain optimistic about the stock outperforming Netflix and broader indices.
At the first quarter earnings call, Sirius' CEO illustrated how powerful the company's reported "monopoly" status is:
"As we've said many times, business models matter. We not only have a lot of users, but we have a fantastic model for monetizing this usage through subscription services. Our business model is superior to that of terrestrial radio and the Internet radio companies we compete with. The subscription business is a great one. SiriusXM has more paying subscribers than all the other companies in the world combined. Also, at a time when more and more content is available and consumers continue to be time-constrained, as there is still only 24 hours in a day, we believe curated content, especially SiriusXM-aggregated curated audio content, is more important than ever and will be even more important in the future as even more content becomes available especially on the Internet".
Results yet again showcased momentum with net subscriber adds of over 400K (8% increase over the same quarter last year) being driven by rising domestic auto sales. At the same time, churn rate not only remains low but has also declined to 1.9 with a 45% conversion rate. Unlike Netflix's notorious price hike, Sirius' price hike has been endorsed by the market and "clearly exceeded… expectations".
Many bears are quick to bring up Pandora (P), but Pandora has failed to catch on like Sirius. More important is the reason why it has failed to catch on: it lacks the talent of Sirius. When it comes to succeeding in media, it is all about recruitment and stars. The business model of Pandora is very Netlfixesque while Sirius fosters talent. Its competitive advantage is sustainable--being able to retain the likes of Howard Stern will secure future streams of free cash flow.
But it is not just the sustainability and proven momentum that makes Sirius more undervalued than Netflix and Pandora. It is also a pure growth story. It bewilders me how the Sirius bears often like to talk about the bulls have their heads in the cloud but fail to produce the one fundamental-driven analysis: a DCF model. Based on my assumption of 19.8% per annum growth over the next six years, operating metrics staying at historical levels, and 2.5% perpetual annual growth, I find that the stock is easily worth north of $2.50 by any reasonable WACC. This factors in the dilution from equity conversion.
Then there are the net operating losses whose value exceeds market cap. For a company that is already in positive free cash flow territory, this speaks volumes about the market's singular focus on Liberty (LMCA) so-called "stranglehold" on value. With the capital markets in a highly uncertain state, the takeover potential is, in my view, actually a price floor.
In sum, Pandora is not a serious threat to Sirius, Netflix is not at all like Sirius, and Liberty's power won't deter outperformance. From beating expectations to delivering value for customers and shareholders, Sirius is - in more ways than one - a winning pick.
Additional disclosure: Disclaimer: We seek IR business from all of the firms in our coverage, but research covered in this note is independent and for prospective clients. The distributor of this research report, Gould Partners, manages Takeover Analyst and is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence.