Digital Radio Pay Off Nears

dr-2There are some stocks that seem to generate nothing but hope . Take digital radio companies, Sirius XM Radio (NASDAQ: SIRI) and Pandora Media (NYSE: P) for example.

The two companies are favorites of tech investors. They sell their product—radio—through very different business models, and provide a lot of amusing anecdotes for stock writers to speculate on as digital radio pay off nears.

Sirius XM Makes Money

In a nut shell, Sirius beams radio programming to cars that are equipped with its systems. The company has a large captive audience because major car makers install its equipment in new models and give car buyers a years’ worth of free programming. Sirius also offers a lot of original programming, including the ever popular Howard Stern, music, and stand up commentary.

Unlike Pandora, Sirius actually makes money. Sirius made $3.49 billion in revenues in the first quarter of 2013.  So it’s easy to see why Sirius is a popular value bargain; it makes money, but it’s cheap. The problem is Sirius is always a bargain. In 2014 it was trading at $1.86 a share. In the last year it has traded between $4.73 and $6.92. Investors are waiting for a break out.

Pandora Doesn’t

Pandora gives away radio programming that it has to pay for for free online. This service has proven popular. A ratings service even claimed Pandora is the most popular station in the nation’s second largest radio market: Los Angeles. The problem is that Pandora has to pay huge fees to the music industry for its product: music. It has no original programming and is working on making revenue, which isn’t unusual in the world of Internet technology.

However, Pandora’s performance is  anemic. Its earnings yield is around 1.49%. Sirius’s was 15.49% at the same time—get the picture? Pandora has tried to make some money by selling advertising, but the book is still out on that venture. Despite its inability to make money, Pandora is still popular with some investors.

So there’s a bit of a mystery here; one company actually makes money, yet its share price is dismal. Another company loses money, yet its share price is a lot higher. Yet both stocks are cheap, and digital radio has proven to be a viable business. Sirius competes with Pandora through its own online service. Some value investors smell money here.

Google and Apple Enter Neighborhood

Sirius and Pandora now face some big competitors with a lot of money to burn, namely Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG). Both tech giants rolled out Pandora clones in an attempt to cash in on Internet radio.

Google calls its venture All Access, and Apple predictably calls its product iRadio. iRadio would seem to be a huge threat to Pandora because of Apple’s close relationship with the music industry. Yet the iRadio launch was delayed by negotiations with music companies, probably because big name musicians have started demanding a cut of the gross or the actual money that their songs make. That’s the same deal movie stars have had since the 1950s.

It’s hard to see how Pandora can compete against Google and Apple except that both Sirius and Pandora have a head start on their new competition, and sometimes that’s just enough to beat the competition to home plate.

Sirius might also be able to compete because it can offer exclusive content. Sirius also has a potentially deep pocketed backer in the form of Liberty Media Corporation (NASDAQ: LMCA).  Liberty’s owner, Charley Malone, was able to take effective control of Sirius.