) and Pandora (
) are radio services, they operate in different spaces and have
several key distinctions in terms of their business model and the
medium of delivery. Sirius XM is a satellite based radio service
catering primarily to vehicle owners. On the other hand, Pandora is
an Internet radio service with presence across a variety of mobile
devices as well as in-car systems. While Sirius XM derives the bulk
of its revenue from subscriptions and is highly profitable, Pandora
is reliant on advertising and is still making losses.
Needless to say, Pandora's stock has been more volatile in
recent quarters. Comparing the average revenue per user (ARPU), it
becomes clear that Sirius XM has done much better in terms of
monetizing its user base. This is one of the reasons why its
business is more stable and operating cash flow has shown
consistent growth. We believe that Pandora should make efforts to
promote its own subscription service. In an event where 30% of its
active users become subscribers, the company can double ARPU.
Our price estimate for Sirius XM stands at $3.45
, implying a discount of more than 5% to the market price.
See our complete analysis for Sirius XM
Staggering Difference Between Sirius XM and Pandora's
We estimate that Sirius XM's annual subscription revenue per
user currently stands at $134, with total annual revenue per user
approaching $155. In comparison, Pandora's annual advertising
revenue per active user is just around $8, with total annual
revenue per user slightly north of $9.40. This is a staggering
difference as Sirius XM is charging a lot more to its subscribers.
So why are they paying for it? The reason lies in the content
quality that the company offers. Sirius XM is able to afford some
unique content and talk show hosts that Pandora can't because the
former has room to do so due to its healthy ARPU and margins.
Pandora too can do something similar if it can make a substantial
improvement in its profitability. To achieve this, it may need to
promote its subscription service alongside improving its mobile ad
monetization. Currently the company has less than 4 million
subscribers in comparison to more than 70 million active users.
There is a lot of room for growth provided the right focus. The
subscription ARPU is close to $36, substantially more than
Sirius XM's High ARPU Is Aiding Strong Margin Growth
Sirius XM's EBITDA margin (earnings before interest, taxes,
depreciation and amortization) has grown substantially over the
last few years driven by revenue growth and controlled expenses.
Revenues have increased primarily due to subscriber growth and
higher average revenue per subscriber. Besides capitalizing on the
U.S. automotive market's growth, the company has successfully
tapped into the used vehicle market with an increasing number of
pre-owned vehicle dealer partnerships. The average revenue per
subscriber has grown due to price increases, and more subscribers
are opting for Internet add-ons. It appears that the economies of
scale are kicking in due to growing ARPU and aiding the company's
margin expansion. Several key cost components including subscriber
acquisitions costs, general & administrative costs, marketing
costs and billing costs have come down as a proportion of
Sirius XM's adjusted EBITDA margin jumped from 1.9% in 2008 to
about 35.3% in 2012. We further expect this figure to reach close
to 45% by the end of our forecast period. If we look at other media
and telecom companies, we conclude that Sirius XM is on track to
become one of the highest margin businesses in this industry.
Comcast's EBITDA margin currently stands at just under 42%, and
other media & telecom companies such as Time Warner Cable,
Disney, Time Warner, Pandora, Dish Network etc., have lower
Our price estimate for Sirius XM stands at $3.45, implying a
discount of more than 5% to the market price.
How a Company's Products Impact its Stock Price at