How Big Is The Used Car Opportunity For Sirius XM?

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With new car sales growth moderating, satellite radio provider Sirius XM (NASDAQ:SIRI) is banking on the used car market to provide the next wave of subscriber growth. The company’s CEO, Jim Meyer, has repeatedly said that the used car space provides a substantial growth opportunity and they have made significant initial inroads into this market. However, there still is additional ground to cover.

Only 30% of the cars out on the roads in the U.S. have Sirius XM satellite radio equipment installed. Though growing at a relatively slower pace, the used car market is significantly larger in size than the new car market. More than twice as many used cars as new cars are sold in the U.S. every year. While the penetration rate for Sirius in the new car market is high at over 70%, it is less than half the figure in the used car space.

In the recent Goldman Sachs annual Communacopia Brokers Conference, Jim Meyer said that the company has been doing very well with used car “franchise dealers”, but there is still significant scope for improvement when it comes to “independent dealers” and “private deals”. [1] The company is aggressively authorizing franchise dealers to offer Sirius XM subscriptions, and striving hard to target used car buyers effectively in the other two market segments.

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Our current price estimate for the company stands at $3.94, implying a premium of less than 5% to the current market price.

See our complete analysis for Sirius XM

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%. [2] In contrast, used car sales increased by only 0.6%, but totaled at a massive 41.25 million. [3]

Penetration is high at over 70% in the new car space and is below 40% in the used car space. 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. [4] This figure would have improved to some extent in the last four years, as relatively newer models became available for sale again. Americans on average keep a new car for about six years, before selling it off through one of the three aforementioned channels. [1]

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 easily provide the next wave of subscriber additions for the satellite radio provider. In fact, the present car market scenario is indicative of the huge growth opportunities at hand. At present, there are about 240 million cars in the U.S. and Sirius XM’s equipment are installed in just 75 million. The satellite radio company can narrow this gap by aggressively targeting the used car market. In fact, Jim Meyer said that by 2025, 180 million cars in the U.S. will have Sirius XM services running. [1]

How Sirius XM Is Tapping The Opportunity

A few years back, Sirius XM introduced its “direct-to-dealer pre-owned program” authorizing franchise dealers to offer Sirius XM subscription to used car buyers. Franchise dealers represent a third of the used car market and this is the area where Sirius XM has been doing very well. The company considers franchise as the most lucrative channel, since relatively high priced cars get sold here first. Jim Meyer stated in the Goldman Sachs conference that the company’s biggest growth opportunity in the used car market lies in the franchise space at least for the next four years. [1]

Back in 2010, only 100 dealers were included in the direct-to-dealer program, but the figure has rapidly gone up to 17,000. In 2013, 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. [5] Last 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. [6]

Sirius XM is still facing difficulties with used car buyers in the “independent dealer” and “private deals” segments, which account for about two-thirds of the used car market. According to Jim Meyer, there is a notable demographic difference between the used and new car buyers. Unlike franchise segment, it is difficult to find customers in a timely manner, when they are buying a used car through the other two channels. And the customer demographic buying cars from individuals or independent dealers is likely to get bigger going forward. [1] Therefore, Sirius XM needs to conceive of a way to better target these channels, to capture the potential they offer.

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Notes:
  1. Sirius XM Holdings’ (SIRI) CEO Jim Meyer Presents at Goldman Sachs 24th Annual Communacopia Brokers Conference, Seekingalpha, Sep 17 2015 [] [] [] [] []
  2. Automotive News []
  3. Used Car Sales Figures from 200 to 2014, About Autos []
  4. Used car market for Sirius XM getting meaningful, Sirius Buzz, May 18 2010 []
  5. Sirius XM Launches Service Lane Program, Sirius XM, Aug 21 2013 []
  6. Sirius XM Auto Dealers Programs Receive Reynolds Certification, Sirius XM, Jun 12 2014 []