Large, well-known companies often capture the majority of business news coverage and investor attention, but lesser-known stocks might offer favorable investment opportunities. A market segment worth exploring is the mid-cap stock category, which includes companies with market capitalizations ranging from $2 billion to $10 billion. Sirius XM, traded under the symbol SIRI, and Dutch Bros, under BROS, fall within this mid-cap stock category. Both are recognized consumer brands with extensive business histories, although they operate in distinct market segments. The question remains which of these companies holds better long-term return potential.
Sirius XM operates two main businesses: its namesake satellite radio service and Pandora, a streaming service providing audio content such as music and comedy, with most revenue derived from advertising. In the fourth quarter, the satellite radio segment generated nearly three-quarters of Sirius XM’s total revenue, although this revenue decreased by 6% to $1.6 billion. Positively, the company observed a growth of 149,000 self-pay subscribers in the fourth quarter, following previous declines.
However, challenges persist for Pandora and off-platform business, as self-pay subscribers decreased by 101,000 in the final quarter, partly due to a broad price increase implemented on March 4. Overall, Sirius XM’s quarterly revenue dropped by 4.3% year over year, falling just below $2.2 billion. If Sirius XM can sustain its subscriber growth in satellite radio, it may curb the revenue decline. Management forecasts an annual revenue of $8.5 billion, which would mark a decline exceeding 2% from 2024. On a positive note, careful cost management resulted in a nearly 24% increase in diluted earnings per share, reaching $0.83 in the fourth quarter.
Dutch Bros, established over three decades ago, operated nearly 1,000 drive-thru locations primarily serving beverages by the end of 2024. Approximately half of their offerings are coffee and coffee-based drinks, with the remainder split between energy drinks and refreshments such as tea, lemonade, and smoothies. The company’s emphasis on speed, quality, and service has clearly resonated with consumers, as evidenced by a 6.9% increase in fourth-quarter same-store sales, driven by higher average customer spending and increased traffic. Management forecasts a 2% to 4% increase in same-store sales for the current year.
In 2024, Dutch Bros opened roughly 150 new locations, and with its presence in only 18 states, there is significant room for expansion. The company plans to open at least 160 additional shops this year. Dutch Bros operates profitably, reporting earnings of $0.03 per diluted share on a generally accepted accounting principles (GAAP) basis for the fourth quarter, compared to a $0.02 per share loss the previous year.
Regarding investment decisions, Dutch Bros’ success is well recognized. As of March 30, the stock appreciated about 88% over the past 12 months, in contrast to Sirius XM’s 42% decline and the S&P 500 index’s 6.7% rise. This growth has resulted in a high valuation for Dutch Bros, with a price-to-earnings (P/E) ratio of 182, compared to Sirius XM’s 8. For Sirius XM to sustain profitability growth, revenue expansion is necessary, despite challenges including intense competition. Meanwhile, Dutch Bros presents a viable long-term investment option given its successful drive-through model and significant growth potential. For investors concerned about valuation, employing dollar-cost averaging could help distribute purchases over time.
