Sirius vs. Netflix: Buy Or Avoid?

David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Sirius and Netflix are two stocks that always generate a strong amount of bear commentary. In my view, however, they have fundamentals that are positioned in entirely different competitive settings. If nothing else, one has momentum to work off of while the other does not.

Sirius XM (NASDAQ: SIRI): Still A "Buy"

It is no secret that Sirius has been one of my bull calls for some time now. Fortunately, it has also been a terrific call, with the stock returning nearly 40% over just the last three months - more than 14-fold the return of the NASDAQ over the same time period. Several factors have resulted in the company generating considerable appreciation.

First, results have been terrific - double or triple what was expected several times in the last 5 quarters (although on EPS of $0.02). Second, investors are starting to realize that Liberty Media's right to a vast majority stake is less of a headwind than they originally thought. Indeed, the CEO of Liberty Media, Mel Karmazin, recently gave a conference with Sirius XM and spoke about revenue hitting a phenomenal $3.4 billion this year with the third quarter addition of 446,000 subscribers. It is even more incredible when you consider that the company has already realized the initial guidance of 1.3 million subscriber net additions and has now set guidance to 1.8 million (the second time it has boosted guidance on net adds).

As the company puts tens of millions of net operating loss carry-forwards on the books, profit margins will grow even more,  creating a cash chest for future growth opportunities. But what about Pandora (NYSE: P), which the bears claimed was going to bring about the end of Sirius's near monopoly on satellite radio? Well, thus far, results have mirrored just my prediction of how they would turn out: Pandora has not really had an impact. Not surprisingly, the stock is down 32% since it went public, while EPS has been in the red by $0.20 per share over the TTM. I thus recommend buying shares in Sirius to capitalize off of this competitive edge and momentum growth.

Netflix (NASDAQ: NFLX): Still An "Avoid"

Unlike Sirius, Netflix just doesn't have the magic. It's funny that it took a price hike that ticked off customers for the Street to appreciate the company's vulnerabilities. Specifically, it doesn't have a sustained competitive edge. From piracy to proliferation of free legal mediums, like Hulu and YouTube, video content is becoming increasingly scorned when a price tag is attached. Thus the worsening brand image of Netflix.

That's why it makes sense to look at an Netflix investment in terms of what earnings it can reasonably generate and whether this is enough to justify the current valuation. Analysts forecast 22.8% annual EPS growth over the next 5 years. I find this much too optimistic. But, assuming Netflix grows EPS by 20% annually over the next half decade, 2016 EPS would come out to $4.53. It would take a 24x multiple for the stock to justify its current price tag at a discount rate of 10%. This easily warrants holding off in the stock.

Perhaps most disconcerting is Amazon's introduction of a video library that undercuts Netflix's current price offering. If Netflix no longer has the brand image to leverage, then what can it rest on? Redbox, which is basically a vending machine that lets you rent movies for as low as $1 with coupons, further cuts into Netflix's price and comes with the added bonus of quick delivery - even if it has to be picked up. I thus recommend avoiding the stock and not hallucinating that it will return to its stratospheric ~$300 price any time soon.

TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Netflix. Motley Fool newsletter services recommend Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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