Looking at Sirius XM’s Ad Business Prospects

Advertising accounts for only 4% of Sirius XM‘s (NASDAQ:SIRI) stock value by our estimates, while the company is making efforts to improve advertising sales as is evident from the trend over the years. The latest and much anticipated initiative is SatRad 2.0, expected to be launched in the coming months, is said to have a dual business model of subscription and advertising which is desirable for the company. ^[1] Presently, Sirius XM makes majority of its revenues through subscriptions and this is highly co-related with automobile sales, and hence an additional revenue stream such as advertising will be worthwhile in the long-run. Terrestrial radios and Internet radio like Pandora (NYSE:P) and Spotify are advertisement focused business models compared to Sirius that has a “commercial-free” approach. With a sizable number of listeners and subscribers, it’ll be interesting to see is Sirius XM is able to leverage its vast and affluent listener base to make meaningful advertising revenues.

Our complete analysis for Sirius XM Radio’s stock is here.

Advertising Just a Small Piece of Sirius XM Revenues

Sirius’s advertising income got a boost after it merged with XM in 2007, increasing from $34 million in 2007 to $70 million currently. However, this is small percentage of Sirius XM’s overall revenue mix with the majority of the revenues coming from subscriptions. This business model makes it highly dependent on automobile sales and the overall health of the economy. While the company has been exploring new avenues to improve ad sales over the years, its “commercial-free” approach for music channels that has brought it thousands of subscribers has held it back.

What Does the Future Hold?

Though small, Sirius XM’s advertising revenues have been improving slowly with the revenues increasing 18% y-o-y in Q3 2011 and by 16% for nine-months ended September 30, 2011 compared to 2010. According to the company, “the increase was primarily due to more effective sales efforts and greater demand for audio advertising resulting in increases in the number of advertising spots sold as well as the rate charged per spot.” ^[2]

In a survey by The Media Audit a couple of months back, Sirius XM’s listener time increased by 19% in the past three years as a sizable number of satellite radio listeners are tuned in to news, sports, and public radio. ^[3] These three segments in particular offer tremendous opportunity for Sirius to grow its advertising revenues as they are non-music channels and it can more creatively insert ads in the form of corporate sponsorships for shows and celebrity endorsements. ^[4]

While we forecast Sirius XM’s advertising revenues will increase from $77 million in 2012 to $131 million by the end of our forecast period, Trefis members expect an increase from $75 million in 2012 to $120 million during the same period.

We currently have a Trefis price estimate of $2.11 for Sirius XM Radio’s stock, about 10% above the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Game Changing Patent Approved for Sirius XM, Satwavespro, Dec 2, 2010 [↩]
2. SiriusXM Reports Record Third Quarter 2011 Results, Nov 1, 2011 [↩]
3. The Media Audit: Listening to Sirius XM is up 19%, Radio-info, Sept 28, 2011 [↩]
4. Sirius XM: Impressive Numbers, But Squandering Opportunity?, SeekingAlpha, Sept 28, 2011 [↩]