Spotify vs. SiriusXM: Which Stock Will Be Music to Investors’ Ears?
Stock Analysis & Ideas

Spotify vs. SiriusXM: Which Stock Will Be Music to Investors’ Ears?

The global music industry has seen a sea change, moving from physical product sales to streaming access models. According to Forbes, streaming revenues grew 20% year-over-year in 2020 and made up 62% of global recorded music industry revenues.

Considering the popularity of music streaming services, let’s compare two music streaming services, Spotify and SiriusXM, using the TipRanks stock comparison tool, and see what Wall Street analysts are saying about these stocks.

Spotify Technology S.A. (NYSE: SPOT)

Shares of Spotify Technology have taken a beating in the past month, with shares tanking 26.1%. This fall in the stock price has been fueled by the Joe Rogan controversy and a modest Q1 outlook.

The Joe Rogan controversy started with the music streaming giant making heavy investments into podcasting, with the largest of its deals, worth around $100 million, going to the Joe Rogan Experience podcast. However, there has been a perception that Joe Rogan spread misinformation about the pandemic, leading to legendary artists demanding that their own music be pulled from Spotify.

When it came to Spotify’s fourth quarter, it proved to have its largest growth in Monthly Active Users (MAUs), increasing 18% year-over-year to 406 million, which is near the top end of its outlook.

For Q1, the company anticipates MAUs of 418 million.

However, it is SPOT’s gross margin that is a cause for worry for Wells Fargo analyst Steven Cahall. In Q4, the company’s gross margin was 26.5%  and the analyst termed the company’s Q1 guide of a gross margin of 25% an “eyebrow-raiser.” The analyst stated that this outlook was 50 basis points lower than SPOT’s Q1 gross margin in the years 2020 and 2021.

By the analyst’s estimate, SPOT will be investing more in podcast content and ad-supported services in 2022, which will drag down its gross margin in Q1. The analyst added that Spotify’s research and development costs in 2022 could negatively impact its operating margin.

Indeed, the company anticipates operating loss to widen from €7 million in Q4 to €67 million in Q1.

Spotify stated on its Q4 earnings call that its investment in more content and music initiatives are being made with an eye on achieving its long-term goal of “1 billion users, 20% plus revenue CAGR [Compounded Annual Growth Rate] and a 30% to 40% gross margins.”

While the company has not quantified what it means by “long term,” analyst Cahall thinks that “investors [will] walk away more worried on the medium-term margin profile” and expects margins will “remain a point of contention until expansion comes into view.”

What’s more, Cahall expects that SPOT will achieve its gross margin of 30% to 40% only by 2030, which is a long wait for higher margins for investors. Moreover, the analyst’s 20-year customer lifetime value (CLV) model implies “cumulative profitability of €45 per Spotify subscriber, vs €50 prior.”

The customer lifetime value is calculated as the revenue generated by the average customer over their entire relationship with a company.

As a result, Cahall is bearish about SPOT with a Sell rating, and has also lowered the price target from $200 to $153 (7.8% downside) on the stock.

Other analysts on the Street are cautiously optimistic about the stock, with a Moderate Buy consensus rating based on 16 Buys, 6 Holds, and 1 Sell. The average Spotify stock prediction of $246.55 implies upside potential of approximately 48.6% to current levels for this stock.

SiriusXM Holdings (NASDAQ: SIRI)

SiriusXM Holdings is an audio entertainment platform that offers subscription and ad-supported audio products. The company operates two businesses: SiriusXM and Pandora. The company’s Sirius XM business offers podcasts and infotainment services in the U.S. on a subscription fee basis.

The SiriusXM service is distributed through proprietary satellite radio systems and streamed through applications for mobile devices, home devices, and other electronic equipment.  SIRI’s Pandora business, on the other hand, operates a streaming platform that offers music, comedy, and podcasts.

Pandora earns revenues through an ad-supported radio service, an on-demand subscription service (Pandora Premium), and a radio subscription service (Pandora Plus). As of December 31, Pandora had around 6.4 million subscribers.

The company delivered strong results in Q4 and FY21, with revenues reaching a record $8.7 billion, up 8% year-over-year in FY21. SIRI also delivered an adjusted EBITDA of $2.77 billion, an increase of 8% year-over-year.

Jennifer Witz, CEO of SiriusXM, commented, “2021 was an outstanding year across the board. We added more than one million net new SiriusXM self-pay subscribers for the tenth time in the past 11 years; this growth continues to be sustained by a fifth straight year of improving churn.  Once again we outperformed all of 2021’s public guidance, and now our strong financial position enables us to declare a special cash dividend to our stockholders.”

As a result, Sirius XM’s Board of Directors declared a special cash dividend of $0.25 per share, payable on February 25, to shareholders of record as of February 11. The total cash dividend amount is expected to be around $1 billion.

Barrington Research analyst James Goss was upbeat about the company’s ability to develop multiple ways to generate growth momentum. This included the rising penetration of SIRI’s 360L platform, with more than 25% of SiriusXM-equipped vehicles sold in Q4 having this platform. 360L is a platform that “combines streaming and satellite-delivered content for an enhanced consumer experience.”

The analyst added that the increasing penetration of 360L nicely dovetailed “with increased usage of the Sirius XM app, with streaming doubling consumption of the audio services.”

Goss thinks that this pattern will reduce churn and benefit pricing potential for the company.

The analyst is also positive about SIRI’s move into podcasting and the expansion of its content creation activity to drive user engagement.

While the analyst remained bullish about SIRI with a Buy rating, he lowered the price target from $8 to $7.50 (10.3% upside) on the stock. That’s because Goss is concerned about soft auto sales. He also thinks that cash generation in 2022 will face “pressures from continued elevated spending on replacement satellites as well as working capital and most importantly, increases in cash taxes.”

Other analysts on the Street, however, are sidelined on the stock with a Hold consensus rating based on 4 Buys, 2 Holds, and 2 Sells. The average SIRI stock prediction of $7.03 implies upside potential of approximately 3.4% to current levels for this stock.

Bottom Line

Analysts are cautiously optimistic about SPOT and are sidelined about SIRI. Brushing aside margin concerns and the current Joe Rogan controversy, based on the upside potential over the next 12 months, SPOT certainly seems to be a better buy.

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