Sirius XM Is Banking On The Used Car Market For The Next Wave Of Subscriber Additions

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Satellite radio provider, Sirius XM (NASDAQ:SIRI), mainly distributes its radios through automakers, retail locations and their websites. The company has contracts with nearly all major automobile manufactures such as Ford (NYSE:F), General Motors (NYSE:GM) and Toyota (NYSE:TM), to install Sirius XM’s radio in their cars. From 2009 to 2011, the company’s penetration rate in the new car market increased from 55% to 67%, which coupled with moderate growth in new car sales, propelled its subscriber growth. However, during the next two years, the figure increased by just 3 percentage points. In fact, it reached just 71.5% in Q3 2014, indicating that SiriusXM’s new car penetration is nearing saturation. Meanwhile, growth in new car sales remains moderate, and is unlikely to gain significant momentum going forward.

It is evident that Sirius XM needs to look at alternate options to sustain the growth in its subscriber base. Although it may not be able to relive its glory days given that it already has over 25 million subscribers, it can ensure some gains from the current levels, if it can effectively leverage the opportunities presented by the used car market. The used car market is almost thrice as large as the new car market, and even though its growth has been slow over the past few years, it holds huge potential for Sirius XM, since the company’s penetration in the market is low.

Our current price estimate for the company stands at $3.58, implying a premium of more than 5% to the current market price.

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Huge Opportunities In The Used Car Space

Although the new car industry is growing at a faster pace than the used car industry, it remains significantly small in size as compared to the used car market. In 2014, around 16.53 million new cars were sold, which reflected a year-over-year increase of 6%. [1] In contrast, used car sales increased by only 0.6%, but totaled at a massive 41.25 million. [2] If Sirius XM’s penetration in both the markets were similar, the new car market would clearly have been the prime focus area for the company. However, penetration in the new car space is high at over 70%, and in the used car space, it is probably below 40%. An article published on Sirius in the publication Buzz in 2010 claimed that only one-third of the used cars in the U.S. are satellite enabled, which indicates that Sirius XM’s penetration in the market could not have been more than 30% in 2010. [3] We have assumed that this figure might have improved to some extent in the last four years, as relatively newer models became available for sale again. During its previous earnings call, the company said that 28% of the vehicles in operation in the U.S. have Sirius XM radio installed, and this figure will improve considerably in the years to come, as the fleet continues to turn over. [4]

Given the size of the used car market, as well as Sirius XM’s low penetration rate, it appears that the second-hand car industry could provide the next wave of subscriber additions for the satellite radio provider. In fact, the company’s conversion rate is below 30% in the used car market and over 40% in the new car market. [5] Hence, there is ample room for improvement on this aspect as well. During the Q2 earnings call, management stated that there are about 65 million satellite enabled vehicles in the country at present, and the figure is likely to grow to 120 million in five years and 150 million in 10 years. CFO David Frear expects used car trials to surpass new car trials in the foreseeable future and double in the next decade. These numbers suggest that the company is extremely confident about potential growth in the used car market.

What Sirius XM Is Doing To Target The Used Car Space

The company has been targeting used car buyers with its two-week free subscription and low introductory prices. A few years back, it introduced its “direct-to-dealer pre-owned program” authorizing dealers to offer Sirius XM subscription to used car buyers. Back in 2010, only 100 dealers were included in this program, but it increased rapidly to 14,000 dealers at the end of Q3 2014. [6] In August last year, the company launched its Service Lane program, in which it offers a two-month free subscription to car owners who bring their cars for servicing at particular stations. [7] Earlier this year, Sirius XM announced that dealers who use Reynolds ERA DMS via Reynolds Certified Interface Program will be able to participate in pre-owned and Service Lane programs. [8]

With its aggressive foray in the used car space, Sirius XM was able to report its best ever performance in the used car space in Q3 2014. The company reported 2.8 million new car trials and 1.3 million used car trials for Q3 2014. Overall for 2014, the CEO expected 2 million gross additions in the self-pay subscriber base on account of the used car industry, which would reflect a year-over-year improvement of close to 30%. [4] While some believe that opportunities in the used car market for Sirius XM are over-hyped, it certainly holds some promise for the company from a long term perspective.

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http://investor.siriusxm.com/releasedetail.cfm?ReleaseID=817666
Notes:
  1. Automotive News []
  2. Used Car Sales Figures from 200 to 2014, About Autos []
  3. Used car market for Sirius XM getting meaningful, Sirius Buzz, May 18 2010 []
  4. Sirius XM Q3 2014 earnings transcript, Oct 28 2014 [] []
  5. Sirius XM Q2 2014 earnings transcript, Jun 29 2014 []
  6. Sirius XM Annual Stockholder Meeting, May 19 2014 []
  7. Sirius XM Launches Service Lane Program, Sirius XM, Aug 21 2013 []
  8. Sirius XM Auto Dealers Programs Receive Reynolds Certification, Sirius XM, Jun 12 2014 []