As expected Sirius XM (NASDAQ:SIRI) reported a net gain of 446,000 subscribers in Q3 as its released its third quarter earnings.  The company stuck to its latest full-year guidance of 1.8 million net additions, but given what we saw last year and the continued strength in auto sales, we won’t be surprised if the company beats its own guidance again next quarter. The rebound in auto sales has helped Sirius XM to a great extent and a good reception for its price increase has been icing on the cake. Overall, for the first 9 months of 2012, Sirius XM has managed to grow its revenues by 14% compared to the same period last year. 
Can Sirius XM Beat Subscriber Guidance Again?
Sirius XM’s growth has primarily come 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.  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 helped by higher availability of financing and lease deals.
Now it appears that October auto sales were healthy too despite the impact of Hurricane Sandy, coming in at an annualized run rate of 14.4 million.  The automakers are still confident about the full year U.S. vehicle sales forecast of 14.5 to 14.7 million for 2012.  If the vehicle sales remain strong, Sirius XM can blow past the 1.8 million net additions for 2012.
Last year, Sirius XM added over 500 million net subscribers in the last quarter. This implies that Q4 contributed more than 30% to Sirius XM’s annual subscriber additions in 2011. If something similar happens in the last quarter of 2012, the company could easily beat its own guidance again.
The Year 2013 Will Be About Product Enhancement & Used Car Market
Next year’s vehicle sales growth is expected to slow down considerably (~4%).  Therefore, Sirius XM will not solely rely on the growth in the U.S. automotive market. We expect the company to lay greater emphasis on used-car market as well as product enhancement.
As far as product enhancement goes, Sirius XM has already launched on-demand service and is going to launch personalized service by the year end. In addition to this, the company is going to leverage internet as a platform for delivering its music, thus becoming a hybrid service using two platforms (including terrestrial). Sirius XM has a sound business model and can therefore afford to have unique and appealing content to its platform. The company will look to add more such content in order to fight off the competition from other radio service providers such as Pandora (NYSE:P), Clear Channel Radio and others.
We are in process of updating our valuation model for Sirius XM in the light of recent earnings and will have an update ready soon.
Our price estimate for Sirius XM stands at $2.46, implying a discount of about 10-15% to the market price.Notes:
- Sirius XM’s SEC Filings [↩] [↩]
- UPDATE 5-U.S. auto sales post best August in five years, Reuters, Sept 5 2012 [↩]
- U.S. auto sales post best month in 4-1/2 years, Reuters, Oct 2 2012 [↩] [↩]
- U.S. Auto Sales Climb in October, The Wall Street Journal, Nov 1 2012 [↩]
- Sirius XM’s Q3 2012 Earnings Transcript [↩]