A company's stock price doesn't necessarily reflect its value. That is better determined by looking at its market cap, which is the share price multiplied by the number of shares outstanding. But even then, lower-priced stocks often have smaller market caps and more room to grow. This can be because they faced challenges in the past or simply issued additional shares to fund their expansions.
Let's explore the reasons why two stocks trading in single digits -- Sirius XM (NASDAQ:SIRI) and Limelight Networks (NASDAQ:LLNW) --- could make welcome additions to your portfolio right now.
1. Sirius XM
Sirius XM is proof that a small stock price doesn't always mean a small company. Despite trading at around $5.88, Sirius boasts a market cap of $25 billion, which puts it in large-cap territory. The satellite radio giant can deliver value to investors by maintaining its competitive moat and pivoting to new opportunities like podcasting.
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Sirius is the only player in the satellite radio industry, although it naturally faces competition from terrestrial radio. The company bolsters its competitive moat with exclusive content such as the award-winning Howard Stern Show, which last month had its contract renewed for five more years. Sirius is also expanding its footprint in the currently trending world of podcasting following its $325 million acquisition of Stitcher Radio, which closed in October.
Stitcher generated $73 million in revenue in 2019 -- up 42% from the previous year, according to data from research company Statista. And the global podcasting market is expected to grow at a compound annual rate of 27.5% through 2027 as smartphones and digitization increase the accessibility of audio content.
But while podcasting is an exciting long-term opportunity, Sirius's core satellite radio subscriptions still provide roughly 79% of its overall revenue. Third-quarter revenue grew 1% to $2.03 billion as a recovery in new car sales helped offset temporary pandemic-related weakness in the advertising business. The company generated adjusted EBITDA of $661 million -- up 1% from the prior-year period.
2. Limelight Networks
Limelight Networks is a small-cap content delivery network (CDN) operation that helps media companies stream content to consumers. The company's stock fell substantially in October after a weaker than expected third-quarter earnings report. But Limelight is still a compelling long-term investment because of its low valuation and the growing demand for CDN services.
Third-quarter revenue grew 15% year over year to $59.2 million as Limelight benefited from the growing adoption of streaming and remote work during the coronavirus pandemic. But analysts and investors were less impressed with the company's bottom-line performance. Gross margins declined from 40.4% to 36.7%, leading to an operating loss of $2.3 million (narrowing from a $2.6 million loss in the prior-year period).
According to CFO Dan Boncel, that margin weakness was the result of changes in the product mix and network expansion, which reduced asset utilization in the period. Management expects improvements next year, but they didn't provide gross margin guidance at the time of the Q3 earnings call.
Over the long term, Limelight Networks is still a compelling way to bet on the rapidly growing CDN market, which is projected to expand at a compound annual rate of 27% through 2024 as more media companies pivot to direct-to-consumer business models. Limelight is an attractive alternative to more mature rivals like Fastly and Cloudflare because of its lower valuation. The stock trades at a price-to-sales ratio of just 2.2 compared to 30 for Fastly and 50 for Cloudflare.
Risk and reward
Stock in Sirius XM and Limelight Networks both trade for less than $10 per share, but that is where their similarities end. Sirius stock is better for investors who prefer an established, highly profitable large-cap company, while Limelight is more suitable for investors willing to make a riskier bet on a smaller business with more room for long-term growth.
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January 13, 2021 at 08:30PM
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2 Top Stocks Under $10 a Share - The Motley Fool
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