Sirius XM’s (NASDAQ:SIRI) stock price has been inching higher for a while now gaining almost 50% in the last 3-4 months. But do the company fundamentals support where it is right now? Our price estimate for Sirius XM stands at $2.46, implying a discount of about 10% to the market price. We already incorporate a healthy annual subscriber gain and growth in revenue per subscriber in our estimates. However, certain risks remain: the royalty rates could increase in the future and competition from players such as Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Pandora (NSYE:P) and Spotify could slow down Sirius XM’s growth.
Nevertheless, given the recent stock run, it may be possible that the price continues to increase. Given that possibility, it is important for investors to understand what a potential stock price of $3 may mean in terms of Sirius XM’s expected growth and whether or not that is sustainable.
The recent stock run can be attributed to the healthy growth in the U.S. automotive market and the company’s ability to beat its own subscriber guidance in some of the recent quarters. Our base price estimate of $2.46 implies an average annual subscriber gain of more than 1.3 million over the course of next 7 years, thereby increasing Sirius XM’s total subscriber base to close to 33 million by 2019. Furthermore, we expect the average annual revenue per subscriber to increase from $119 in 2011 to $165 by 2019.
However, a $3 price estimate for Sirius XM would imply that, keeping other factors constant, the automotive subscriber base will have increase to 36 million by 2019 as opposed to our current forecast of 28 million. This will increase the overall subscriber base to 40 million, implying an average annual gain of 2.5 million for the next 7 years. Sirius XM gained about 1.7 million subscribers last year, and we expect it to perform along similar lines in 2012 as well.
In another scenario, a $3 price estimate would imply that the average annual revenue per subscriber will have to increase to $210 as opposed to our current forecast of $165 by 2019. This assumes that the other factors remain constant. This figure implies a monthly fee of close to $18, which may be unlikely given that Sirius XM doesn’t have a track record of frequent price increases.
A more realistic scenario that would justify the $3 price is likely a combination of increases in revenue per subscriber and number of subscribers and a higher decline in certain costs than what we forecast. Is this scenario possible given that the competition and content costs are likely to increase? Let us know by commenting in the box below.
Our price estimate for Sirius XM stands at $2.46, implying a discount of about 10% to the market price.