What Sirius XM May Suffer Due To Slower-Than-Expected Subscriber Adds

Over the years, consistent growth in new car sales, long term deals with car manufactures and increased penetration of satellite radio in new vehicles sold have boosted subscriber growth at  Sirius XM (NYSE:SIRI). From 20.2 million in 2010, Sirius XM’s  subscribers increased to 27.3 million in 2014. However, lately, growth in new car sales has slowed and Sirius XM’s new vehicle penetration has stabilized at ~70%, which indicates that the company’s subscriber growth in the future may not be as strong as before. Nevertheless, Sirius XM’s foray into the used car space, its household plans and connect services are likely to compensate for the lack of growth in subscribers from new vehicles. The company is banking heavily on these factors to provide a bulk of its future growth.  Hence, we forecast its subscriber count will increase steadily and reach 38 million over the next five-six years.

Though Sirius XM has made considerable progress in penetrating the used car market and it expects to sustain this momentum in the near term, there exists a possibility that intense competition from free and subscription based music services will not allow runaway growth in the satellite radio company’s subscribers. While Sirius XM has established a niche position for itself in the U.S. radio industry, it isn’t immune to competition. Pandora‘s (NYSE:P) availability in cars, portable audio players such as iPod and Apple’s (NASDAQ:AAPL) music services all present additional competition for Sirius XM. Therefore, it is possible that Sirius XM’s subscriber growth in the future can be a little slower than it has been in the past, on account of higher competition and weaker-than-expected adoption of satellite radios in used cars. Such a scenario can lead to a potential downside of 10%-15% in Sirius XM’s price estimate.

Our current price estimate for the company stands at $3.82, which is inline with the current market price.

See our complete analysis for Sirius XM

Weaker-Than-Expected Subscriber Adds (-10%)

Rising new car sales and increases in penetration rates have been the main growth drivers for Sirius XM’s subscriber base for a long time now. Though penetration rate has now stabilized at around 70% and new car sales growth has moderated, the company still has some room for subscriber growth through the new car market. Apart from this, the company is targeting used car owners as well, who have satellite radios installed their vehicles. The penetration rate in this market is significantly lower as compared to the new car market and the company is constantly signing up more used car dealers, who will offer free trials to customers.  Sirius XM now has 16,000 franchise and independent  dealers registered in its pre-owned program, reporting sales data of used cars. This figure was just 100 back in 2010. Additionally, Sirius XM has enrolled more than 7,000 dealers in its service lane programs, wherein dealers offer trials to customers who bring in their cars for servicing. It has even signed several agreements with dealer management service providers and intermediaries, to facilitate more trials for used car owners. The cumulative impact of these efforts coupled with Sirius XM’s mobile app, household plans and connect services schedule to launch in 2016, should bring in new subscribers every year.

However, consider a scenario, where the aforementioned efforts are offset by growing competition from Internet radio companies, terrestrial radio services, iTunes radio, as well as Spotify. Terrestrial radio services still dominate the car market and Internet radio company Pandora has also made its mark. Even though the quality of content on offer is no match for that of Sirius XM, they are free services which is a big influential factor. Also, Apple’s iTunes Radio and the recently launched Apple Music are set to present a competitive threat to Sirius XM. Spotify too can take away some listener share from the satellite radio provider in the future, once it gets serious in the car market. While Sirius XM’s vast and diverse content provides it an edge over any add-free or add-supported service, the fact cannot be ignored that the industry is highly competitive and the aforementioned players do have the ability to put a dent in Sirius XM’s subscriber growth.

Currently, we forecast Sirius XM’s number of subscribers to increase and reach 38 million over the next five-six years. However, increased competition and difficulty in marketing its product in the used car market (where direct deals with automobile manufactures won’t help), can limit this figure to somewhere around 33.5-34.0 million. Such a scenario will result in more than 10% downside to our price estimate. There is no doubt that Sirius XM’s subscribers will continue to grow in the future, but the rate of addition can come down with the competition getting intense. Spotify is growing strongly and Apple has come out with its Apple Music, which is apparently a combination of iTunes, Pandora, Spotify and social platforms like Tumblr and Instagram. Both these services are strong enough to have a mitigating impact on Sirius XM’s subscriber growth.

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