Satellite radio Sirius XM (NASDAQ:SIRI), is expected to beat its own guidance when it reports its Q4 2012 earnings on February 5. The company will report record 2 million net subscriber additions for the full year 2012, surpassing its earlier expectation of 1.8 million. 
Growing U.S. vehicles sales, Sirius XM’s sustained new vehicle conversion rate and push into the used-car segment are driving these subscriber additions. In 2013, Sirius XM expects more than $3.7 billion in revenues and roughly 1.4 million net subscriber additions.  However, given the continued strength in the U.S. auto market, we expect higher subscriber adds for 2013. We will incorporate these expectations as we update our pricing model following Sirius XM’s earnings release.
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- 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?
Auto Market Fueling Subscriber Growth
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. The automotive market growth is being helped by higher availability of financing and lease deals. The overall auto sales in the U.S. stood at around 14.5 million in 2012 and is expected to cross 15 million in 2012.  In 2011, 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. This metric leads us to believe that Sirius XM was again being conservative in its guidance, and the numbers indicate so.
Besides the vehicle sales, the sustained new vehicle conversion rate and push into the used-car market are helping the company. This means that even though the growth of the U.S. automotive market may slowdown in 2013, Sirius XM has an opportunity to sustain good subscriber growth. Therefore its guidance of 1.4 million net additions may yet again turn out to be conservative.
More Emphasis On Product Enhancement & Used Car Market In 2013
We expect the company to lay greater emphasis on the used-car market as well as product enhancement. Focusing on product enhancements, Sirius XM has already launched an on-demand service and is going to launch personalized service soon. In addition to this, the company is going to leverage the Internet as a platform for delivering music, and 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 on its platform. The company will look to add more such content in order to fight off competition from other radio service providers such as Pandora (NYSE:P), Clear Channel Radio and others.
Current Market Expectations
Over the course of past few months, Sirius XM’s stock has risen significantly on the back of good subscriber performance and share purchase from Liberty Media, which has acquired a controlling stake. The stock price is over $3 now, and it is important to understand what this price may imply relative to our current estimates.
Keeping other factors constant, the automotive subscriber would need to rise to near 40 million subscribers by 2019 as opposed to our current forecast of 28 million. This implies an average annual gain of 2.5 million for the next seven years. Sirius XM gained about 1.7 million subscribers last year and 2 million in 2012.
In another scenario, a $3+ stock price would imply that the average annual revenue per subscriber will increase to around $210 as opposed to our current forecast of $165 by 2019. Again this assuming 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.
While we believe these two isolated scenarios are unlikely alone, a more realistic scenario is a combination of higher revenue per subscriber and number of subscribers as well as lower certain costs than what we currently forecast.
Our price estimate for Sirius XM stands $2.34, implying a discount of about 25% to the market price.Notes:
- SiriusXM Adds 2 Million Net Subscribers In 2012; Issues 2013 Guidance, Sirius XM Press Release, Jan 9 2013 [↩] [↩]
- U.S. Auto Sales Seen Exceeding 15 Million for Full-Year 2013, The Wall Street Journal, Jan 2 2012 [↩]