Sirius XM (NASDAQ:SIRI) has shown some impressive results in the last few quarters as it continued to ride the wave of improving automotive sales and implemented price hikes without any hiccups. However, the stock has suffered over the past couple of weeks, and we believe that the stock is under priced at the moment and that the market is overlooking the positive trends affecting the company. Furthermore, there is possibility that Liberty Media will buy shares to increase its stake in Sirius XM and that could support the stock price as well.
Sirius XM’s business is primarily hinged on automotive sales from big car makers such as GM (NYSE:GM), Ford (NYSE:F) and Toyota (NYSE:TM) and naturally, improving auto sales is the most important positive trend that could lift the stock. Below we discuss this, along with others to make a case for Sirius XM.
Growing Vehicle Sales And Increasing Penetration In Used-Car Market
The U.S. auto sales in the first quarter of 2012 have been healthy, growing at over 13% compared to the same period last year. The upbeat auto sales bode well for Sirius XM as automotive channel is by far the most critical channel for the company to acquire incremental subscribers.
We estimate that currently the automotive subscribers account for more than 70% of Sirius XM’s total subscriber base. Furthermore, we estimate that subscription fee generated from paying subscribers constitutes close to 75% to Sirius XM’s value. Given the growth in automotive subscribers and decline in retail subscribers, we conclude that the automotive subscriptions would constitute roughly 80%+ to Sirius XM’s overall subscription business. This further implies that automotive subscriptions constitute about 60% (80% x 75%) to Sirius XM as a whole.
It’s not just the new vehicle sales that are bringing in subscribers for Sirius XM, the company is also capitalizing on used car segment. Companies such as CarMax and Vehix, which sell used cars, reported that in 2010 the satellite radio penetration in the used car market was around 30%. This figure would have increased notably since then as the used car market has turned into an attractive channel for Sirius XM.
Furthermore, Sirius XM has been able to sustain its vehicle conversion rate at around 45% which implies that increase in vehicles sales will increase subscriber additions proportionally.
Robust Business Model Enabling Unique Content
Sirius XM’s business model is based on subscription fee and therefore the company is able to afford unique and exclusive content that separates it from the other radio services. The company will continue to sustain this ability and therefore, grow its user base. Although the content costs will rise as the royalty fee increases in future, the company can compensate for it by raising its prices. Recent price increases have demonstrated that the user base is quite loyal as the churn rate did not increase. However, since the price increase has affected only a fraction of user-base until now, the real impact has yet to be seen.
Nevertheless, not all is rosy for Sirius XM. Pandora is increasingly pushing into automotive segment, thus presenting a threat to Sirius XM.
In January 2010, Pandora joined hands with Pioneer, an electronics manufacturer to provide internet radio in cars. Since then it has signed up deals with several automotive manufacturers bringing the current total number of signed partnerships with automotive brands to 18 and with aftermarket manufacturers to 7.
Our current price estimate for Sirius XM stands at $2.32, implying a discount of little under 15% to the market price.