Sirius XM vs Spotify Stock: Which Is Best?

The music industry has transformed dramatically in recent decades, shifting from traditional means to online streaming platforms.

Today, streaming accounts for 89% of the total revenue generated by the music industry. Between 2010 and 2020, streaming revenue grew about 34x to $13.4 billion.

By 2022, it was $17.5 billion and this year it is forecast to hit $29.60 billion before rising to $34 billion by 2027, a CAGR of 4.7%.

It is no surprise that this colossal growth of the online music industry has enticed investors to channel their money to promising stocks in this space.

Sirius XM Holdings Inc. (NASDAQ:SIRI) and Spotify Technology S.A. (NYSE:SPOT) are two of the leaders which ranks best?

Will Sirius XM Recover?

Sirius XM’s share price has not been impressive over the past few years. Indeed, it has not even kept pace with the broader market, clocking in  a 40% negative return over the past five years versus Nasdaq’s over 100% increase.

While the growth in the music streaming sector has been astronomical, Sirius XM has seriously lagged. Perhaps even more surprisingly, the company had a real head start by beginning operations in 2008 following a merger and subsequently acquiring Pandora. Not only that but it has a virtual monopoly on audio-streaming among automakers.

One overarching challenge for the company has been its ongoing struggle to retain subscribers. While SiriusXM’s self-pay subscribers increased by 131,000 in the most recent quarter (ended December 31, 2023), the company saw a drop in subscriber base by 445,000 for the full year.

For the quarter, the company lost 225,000 paid promotional subscribers. Self-pay subscribers for Pandora services also declined 3% from the year earlier to 6 million in 2023.

The company’s top line seems to have shifted from growth annually to a marginal decline to $8.95 billion. Nonetheless, Sirius’ net income was $1.26 billion, in comparison to the year-ago figure of $1.21 billion.

Adjusted EBITDA and free cash flow came in at $2.79 billion and $1.20 billion, respectively, which represented 2% and 22% year-over-year declines.

The bad news is not limited there. Management forecasts a decline in revenue and adjusted EBITDA to $8.75 billion and $2.7 billion, respectively, for the current year.

In the long run, the company expects strategic initiatives to pay off and is trying to improve its leverage ratio by the end of 2025 in order to sustain mid-to-low 3x adjusted EBITDA.

Reviving the business is unlikely to happen quickly and will require innovative offerings to remain competitive and ensure gaining back subscribers.

The stock’s forward price-to-earnings of 10.33x makes it look relatively cheap versus peers. However, it’s a mixed jar as it is trading at 1.46x forward sales, which is more than 20% higher than the sector median.

Is Spotify Fairly Valued?

Spotify has grown by over 110% in the past five years and has shown solid momentum lately so valuation is a key concern.

Plans to hike subscription prices in several markets kept investors buoyant on the stock, even more so because the company already benefited by raising prices by approximately $2 for the first time last year.

It is going to begin hiking prices by the end of this month by $1 to $2 in some markets. It has also introduced a basic monthly tier for $11.

The key focus appears now to be on driving sustained profitability, and these price hikes are likely to accelerate that goal.

While the earlier price increase may well have hampered user growth, the company saw higher-than-expected subscriber growth last year. Net additions for the year came in at an all-time high of 113 million.

Monthly Active Users Still Growing Fast

Spotify reported a 23% year-over-year increase in Monthly Active Users (MAU) in the fourth quarter to 602 million and a 15% year-over-year growth in subscribers to 236 million. Both the metrics came in higher than the guidance. Also, user engagement grew significantly across markets.

The company has emerged as one of the most prominent music streaming companies and has set a target to reach a 1 billion user base by 2030.

Revenues for the full year ended December 2023 increased by 13% year-over-year to €13.25 billion ($14.37 billion), while gross profit came in at €3.40 billion ($3.68 billion), up 16.1% year-over-year.

Spotify’s top line numbers outpaced Sirius’ growth in the same time frame but the bottom line resulted in a net loss of €532 million ($577.20 million) compared to €430 million ($466.53 million) in the prior year.

For Q4, Spotify’s total revenue grew 16% from the year-ago value to €3.67 billion ($3.98 billion) and management expects 618 million MAU and 239 million premium subscribers for the upcoming quarter. It expects to generate revenue of €3.6 billion ($3.9 billion). Moreover, the company is expecting healthy growth in user base throughout the fiscal year 2024.

Investors are positive about the company’s potential, resulting in a 3.54x forward sales multiple. This is much higher than both Sirius and the industry average, reflecting investors’ optimism about sustained growth.

Sirius XM vs Spotify Stock, Which Is Best?

Although many of the historical growth figures favor Spotify, analysts expect Sirius to rebound by 46.1% whereas they expect Spotify to fall by 7.5%. 

It appears that on a valuation basis, Spotify is the less compelling buy, even though the tailwinds of growth are in its favor. By contrast, Sirius XM is facing serious headwinds as evident by its loss of subscribers.

It’s possible that analysts are right in the short-term and Spotify will be subjected to profit-taking but the long-term fundamentals may very well drive the stock much higher than present levels.   

Overall, recommendations offered by analysts are also in favor of Spotify with 18 out of 30 analysts considering it a Buy versus 2 out of 11 favoring Sirius, though it must be said one significant backer is Berkshire Hathaway, who may see the current financials as representing a deal to savvy value-based buyers.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.