While Sirius XM (NASDAQ:SIRI) had a good year last year, it expected a slowdown when 2012 began. Nevertheless we have been positive about the company’s ability to add subscribers because of its sustained conversion rate and continued momentum in the auto sales in 2012. In fact the company recently reported that it added close to 600,000 subscribers in Q2 2012 and therefore expects full year subscriber additions to amount to close to 1.6 million and full year revenues to reach $3.4 billion. 
This is perfectly congruent with the expectations that we have maintained since the company’s Q1 2012 earnings release. The current guidance only re-iterates our current price estimate of $2.32 for Sirius XM, which stands at a premium of more than 10% to the market price. Sirius XM’s equipment is primarily installed in vehicles manufactured by the companies such as Ford (NYSE:F) and GM (NYSE:GM).
Continued Growth Will Lift The Stock
Sirius XM has increased its subscriber guidance for 2012 from gain of 1.3 million net subscribers to 1.6 million. Rhyming with this, the vehicle sales forecast for 2012 have gone up slightly over the course of past few months (see Sirius XM May Get A Boost From Strong U.S. Auto Sales). It will be reasonable for us to believe that Sirius XM can achieve its guidance given how the company has been conservative in providing the guidance in the past. In addition to this, we forecast that the company will gain on an average 1.38 million subscribers per year over the course of our forecast period.
Our estimates incorporate the continuation of the momentum that Sirius XM can witness in 2012. Market seems to be discounting this factor as well as Sirius XM’s ability to sustain the new vehicle conversion rate. We believe that as this momentum continues in later half of this year, Sirius XM’s stock could get a boost.
Price Increase Has Been Well Received
Sirius XM started implementing price increase in the beginning of 2012 and there was risk that this might slowdown the subscriber growth. It appears that this is not happening and price increase will aid the revenue growth without compromising subscriber additions. This demonstrates the brand that Sirius XM has established for itself and the quality of its service.
Risk – Future Competition
Sirius XM, although currently a very popular choice for vehicle owners, faces some threats in the future from radio services such as Pandora (NYSE:P) and Clear Channel Radio with their enhanced personalized service that will look to push further into the automotive market. The downside to Sirius XM is that it is heavily dependent on the automotive channel and therefore needs to watch out for any developments in this arena. Overtime, even other services such as Spotify and potentially Apple (NASDAQ:AAPL) will try to establish their presence in in-vehicle systems.
Given that Sirius XM is heavily dependent on automotive channel, number of automotive subscribers is the prime stock driver. There can be an upside of more than 20% to our price estimate if Sirius XM can reach a subscriber base of about 35 million by the end of our forecast period.
On the other hand, if the automotive subscriber additions slow down with total automotive subscriber base amounting to just 20 million by the end of our forecast period, there could be more than 20% downside to our price estimate.
- Sirius XM Earnings: Subscriber Growth Accelerates And Exhibits Future Potential
- Sirius XM Earnings Preview: Steady Subscriber Adds Expected
- By How Much Have Sirius XM’s Revenue & EBITDA Increased In The Last Five Years?
- How Has Sirius XM’s Revenue Composition Changed In The Last Five Years?
- What’s Sirius XM’s Revenue & Net Income Breakdown In Terms Of Different Revenue Sources?
- What’s Sirius XM’s Fundamental Value Based On Expected 2016 Results?
- SiriusXM Adds Over 600,000 Net Subscribers in the Second Quarter; Raises Subscriber and Revenue Guidance, Sirius XM Press Release, July 9 2012 [↩]