Sirius XM (NASDAQ:SIRI) continues to beat its own subscriber guidance, a trend that we have seen for the past few quarters. Earlier this month, Sirius XM reported a gain of 446,000 net subscribers in Q3 2012 and raised its full year guidance to 1.8 million net additions. 
As the company reports its Q3 earnings on October 30, we’ll look for more color on whether Sirius XM’s success is solely due to improved vehicle sales in the U.S. or there are some other critical factors involved. In addition to this, we’ll look for trends in costs, especially content-related expenses. Sirius XM runs a risk of increased costs in the future due to likely increases in royalty rates. We’ll also look for any color on product enhancement and the company’s position against growing competitive threats from Apple (NASDAQ:AAPL), Pandora (NYSE:P) and the new entrant Microsoft (NASDAQ:MSFT).
Growth In Subscribers – What’s The Reason?
Sirius XM’s growth has primarily been coming from automotive subscribers and this largely depends on the broader trend in vehicle sales in the U.S. After a soft start in July, Q3 auto sales picked up in August as sales grew by 20% over the same period in 2011.  Although rebates dropped in August by 4.7% compared to the same period in 2011, there were more financing and leasing deals available, leading to growth in vehicle sales.  September sales were upbeat as well, registering year-over-year growth of 13%.  Overall, Q3 has been a healthy quarter in terms of U.S. automotive market growth and appears to be the primary factor behind Sirius XM’s success. We expect the new vehicle conversion rate would have remained stable and Sirius XM would have got some success in the used car market.
Sirius XM has been also trying to appeal to retail subscribers by expanding its product features. While its subscription model allows it to bring unique content such as Howard Stern and NFL broadcast to its listeners, the radio company has also launched an on-demand service for iOS and Android users. In addition, Sirius XM will also launch a personalized radio service by the end of this year in order to compete with Pandora.
Our price estimate for Sirius XM stands at $2.46, implying a discount of about 15% to the market price.Notes:
- SiriusXM Reports 446,000 Third Quarter Net Additions and Raises 2012 Subscriber Guidance to 1.8 Million Net Additions, Sirius XM Press Release, Oct 10 2012 [↩]
- UPDATE 5-U.S. auto sales post best August in five years, Reuters, Sept 5 2012 [↩]
- Navigating fall auto sales, Market Watch, Sept 21 2012 [↩]
- U.S. auto sales post best month in 4-1/2 years, Reuters, Oct 2 2012 [↩]