Digital media is kicking old-school radio to the curb. That's not a new event, but a long-term trend. SiriusXM Holdings(NASDAQ: SIRI) and Spotify(NYSE: SPOT) are two of the biggest names in audio-based entertainment these days, and these two companies approach the same market from different angles.
Which digital audio expert is the best fit for your stock portfolio? Let's find out.
Different strategies in similar markets
SiriusXM and Spotify do have a few things in common. They provide audio entertainment to millions of users. They rely on encrypted streams of digital audio, so you can't just listen for free. Most of their customers use ad-supported services, but the smaller group of premium subscribers still accounts for the vast majority of their revenues.
But there are plenty of differences, too.
Spotify's listening platform is all online, all the time. You may use a web page, a smartphone app, or a media-streaming smart TV, but you're still tapping into the same Spotify catalog. SiriusXM runs a satellite-based radio service, the Pandora streaming app, and a cloud-based version of the satellite radio stations. That's a more complicated business model.
Most of SiriusXM's premium subscribers come from the automotive industry, where most car radios can handle satellite signals and they ship with a free trial to the service. The car dealers do a lot of the heavy lifting for SiriusXM's sales. For example, Toyota Motor(NYSE: TM) has been selling three-year satellite radio subscriptions with every new and certified used vehicle since September 2024.
Spotify doesn't have that kind of sales support. This company seeks new users through advertising, a broad catalog with plenty of exclusive content, and the occasional cross-promotion deal with popular consumer goods brands. Last week, Spotify launched a global discount offer for members of Adidas' customer loyalty program, for instance.
The average Spotify subscriber paid 4.71 euros (roughly $5) per month for their premium service in the third quarter of 2024. SiriusXM's average revenue per user in the same period was a more substantial $15.16 per month.
What's the upside to SiriusXM?
The car-based nature of SiriusXM's business gives the company a robust selling platform, but also limits its growth prospects somewhat. Spotify has about 640 million monthly active users (MAUs) versus 35.7 million paid SiriusXM clients and 43.7 million MAUs on the Pandora platform. Moreover, Spotify's customer counts are growing at approximately 11% year over year while Pandora and SiriusXM are losing subscribers.
So what does Warren Buffett see in SiriusXM? I don't have a precise answer, since the Oracle of Omaha hasn't explained that investment in great detail, but his Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) business conglomerate actually has a long history of buying stocks that look like SiriusXM.
The company's business may be more complex than Spotify's, but it's still simple and stable enough to work in any economy. SiriusXM pays a generous dividend, currently yielding 5% per year. The payouts are fully funded by free cash flows, even in a slow year like 2024. And did I mention that the stock is cheap?
Growth investors love Spotify, value hounds prefer SiriusXM
If you're picking SiriusXM stock over Spotify today, you're probably looking for a turnaround story. The stock price is down more than 60% in the last two years, despite an ambitious restructuring effort and a resurgent car market.
The stock trades at just 0.8 times trailing sales and 7.9 times free cash flow right now. Earnings are currently negative because of non-cash charges for the restructuring transactions, but SiriusXM's stock is changing hands at 7.5 times next year's earnings estimates.
But if you're a growth investor, Spotify should be right up your alley. The Swedish company's sales are up by 50% in the last three years while SiriusXM's revenues barely moved:
So I can see credible investment rationales for both stocks. Your choice may come down to a question of investing style. Both stocks may perform well in the coming years, in very different ways.
But if I had to pick a single winner here, I'd prefer Spotify's soaring sales and surging cash flows. The stock isn't cheap but you get what you paid for -- an impressive growth story at a turning point in the history of radio and audio entertainment.
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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Spotify Technology. The Motley Fool has a disclosure policy.
