The company needs to focus on monetizing their listeners aggressively, but within reason. If that drives people to other companies, then it probably means that the laborious nature of Pandora’s music cataloging is not ideal. I have too many questions and not enough answers about both Pandora and Netflix, Inc. (NASDAQ:NFLX). The crazy movement of Netflix’s stock scares me, especially considering the loss of titles. I am not sure about Pandora’s long-term potential yet, so I turn to another company in the field.
New-ish radio
Sirius XM Radio has come a long way from the sub-$1 days. Back then, I read a lot of articles talking about subscriber growth, though there were still naysayers calling for the doom of the company. It was a very emotional time and the message boards were war zones.
Since then, Sirius has risen a lot and has become profitable. Reading the earnings report, the company is even boasting about free cash flow, which is a great sign. If free cash flow is consistent, then it can fuel growth through operations and not by tapping the balance sheet or new investors.
Things sound all well and good on the earnings conference call, but all the stats do not need to be rehashed. I think Sirius is one of the few companies that can benefit from a share repurchase, and in December it announced a $2 billion repurchase plan. It should be able to take quite a few shares off the market.
The P/E ratio is pretty low, and revenue is increasing though EPS remains flatter. Focus on the free cash flow and the share repurchase. The company announced it in December but does not seem to have started it, and the price could rise once shares are actually bought.
January 2014 $4.00 calls are cheap at $0.12, if the company starts buying its stock it could push the price upwards. Might be worth a shot. For reference, when I wrote the first draft of this article, the calls I mentioned were at $0.04, so they already made a lot. I wish I’d been quicker but I still have no position.
Conclusion
Pandora is music, and it probably will not expand into any other type of service. Music is an extremely competitive field, and it seems hard to extract more value from Pandora’s consumers to justify the difficulty of its business model without driving listeners to competitors.
Netflix has lots of different kind of visual content, and I do not think the more concurrent streams plan will be a long-term solution to growth, nor will tapping international markets. Netflix is putting off commercials as long as possible, but if it wants to keep its revenue increasing without raising prices, it needs to have them. The stock tends to knife back and forth making it stressful to own, because when bad news hits, it could just collapse.
Sirius is doing a significant share buyback, and is seeing its business grow. Earnings consistency is not there yet, but if it can stabilize earnings into regular growth like revenue, the share price would probably soar compared to the $3-range it is in right now.
The article Content Delivery Companies Are Not Created Equal originally appeared on Fool.com and is written by Nihar Patel.
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