Sirius XM (NASDAQ:SIRI) has done exceptionally well in growing its customer base over the past few years. The company added 2 million net subscribers in 2012, up from 1.4 million in 2010.  As far as 2013 is concerned, it has already gained 1.17 million net subscribers in the first half of the year, representing a year-over-year growth of about 13.5%. Given the continued strength in the U.S. automotive market and the company’s performance so far, it appears that it may cross 2 million net subscriber additions this year as well and beat its guidance once again.
For the month of June, U.S. auto sales jumped 9.2% amounting to 1.4 million units.  This growth was the highest the industry has seen in the last five years and stood notably above the figure for the first half of the year. August was even better with vehicle sales surging by 17%  Consumer spending accounts for 70% of the U.S. economic activity and auto sales are one of the best indicators for that.  It appears that the economy is gradually improving, and the momentum in auto sales could carry into the remainder of the year.
While we have a fair idea of how the company may perform this year, it is important to look at the feasibility of its long-term growth governing its valuation.
Estimating Future Growth
For the last three years, Sirius XM’s subscriber base has grown at an average annual rate of about 8%. The growth rate hasn’t fluctuated much, and in fact slightly grew 9% in 2012 which was a record year for the company. If we look at the absolute numbers, the company gained on average 1.7 million subscribers annually. However, this count has been growing each year, amounting to 2 million in 2012.
During its last earnings announcement, Sirius XM raised its full year subscriber guidance to 1.5 million net additions and expects its adjusted EBITDA to grow by 24%. However, it is highly likely that the company will again beat its guidance as the fundamentals driving the business remain strong and the company continues to invest in enhancing its content, service and dealer partnerships. Sirius XM’s full year guidance suggest that it will see a quarterly subscriber gain of close to 165,000 in the latter half of 2013. Now this seems very low given Sirius XM’s recent history and the ongoing strength in the U.S. automotive market. Given the recent data around U.S. car sales, we feel that Sirius XM can achieve 2 million net subscriber additions this year easily. The conversion rate has remained more or less stable at around 45%-46%.
The only concern could be increasing competition from Pandora (NYSE:P) and potential threat from Apple (NASDAQ:AAPL) and others in the next few years. The traditional radio market is ~$15+ billion. The in-vehicle market accounts for about 47% of the traditional radio market and thus presents a big, untapped opportunity for Pandora. The company is making significant stride on this front and expects one-third of the vehicles sold in the U.S. in 2013 to have Pandora integration. 
Currently, we forecast annual net subscriber additions of 1.6 million over the course of next 6-7 years. However, these estimates may turn out to be conservative, especially in the light of recent strength in the U.S. automotive market. If Sirius XM can hold its ground against rising competition and continue to sustain its new vehicle conversion rate, its subscriber base could grow past 40 million in the long term. This will imply annual additions of 2 million net subscribers, similar to what we expect for 2013, and result in more than 10% upside to our price estimate.
Our price estimate for Sirius XM stands $3.22, implying a discount of about 15% to the market price.Notes: