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Investment Overview for Sirius XM Radio (NASDAQ:SIRI)
- Growth in subscriber base
Sirius XM's strong penetration in the new car market, at 75%, and its growing reach in the used car domain, are driving the growth in subscriber base for the company. Despite reaching what many believed would be a saturation point, Sirius XM is still reporting a sturdy rise in the number of new subscribers as the company is eyeing the potential in the used car market, as well. Also, Sirius XM's connected services, which offer safety, security, and convenience features in the cars, is likely to add to its customer stickiness. The fact that it continually raises its guidance is a testament to its strong standing in the satellite radio domain.
Below are key drivers of Sirius XM's value that present opportunities for upside or downside to the current Trefis price estimate:
- Number of Sirius XM Subscribers: We currently forecast this figure to increase from 31.3 million in 2016 to about 40 million by the end of the Trefis forecast period. If subscriber additions accelerate and Sirius XM reaches a subscriber base of about 45 million by the end of the Trefis forecast period, there could be an upside of about 10% to the Trefis price estimate. This could happen if the company can further increase its penetration and success rate in new as well as used cars. On the other hand, if competition from Pandora and other radio services increases and the subscriber additions slow down amounting to just 36 million by the end of the Trefis forecast period, there could be a little over 10% downside to the Trefis price estimate.
- Sirius XM's Average Revenue Per Subscriber: We currently forecast this figure to increase from $133 in 2016 to about $144 by the end of the Trefis forecast period. If more subscribers upgrade to a higher priced tier and as a result, the average revenue per subscriber reaches more than $180 by the end of the Trefis forecast period, there could be an upside of about 10% to the Trefis price estimate.
Sirius and XM merged in July 2008 to form Sirius XM Radio. The satellite radio service provider offers numerous channels comprising of commercial free music, sports, talk shows, news stations, and other channels in the U.S. Sirius XM radio channels are mainly available through receivers in automobiles but can also be accessed over the internet or through home stereos by using various accessories.
The firm's satellite radios are primarily distributed through automakers ("OEMs"), retail locations, and through their website. Sirius XM has ties with major automobile manufacturers such as Ford, GM, and Toyota. This helps drive its presence in the US automobile space. Additionally, satellite radio services are also offered to customers of certain rental car companies.
The firm's primary source of revenue is the subscription fee it charges customers for annual, semiannual, quarterly, or monthly subscriptions. Additionally, the company derives revenue from activation fees, the sale of advertising on select non-music channels, the direct sale of satellite radios and accessories, and other ancillary services such as weather, traffic, data, and backseat TV services.
It must be noted that Liberty Media is Sirius XM's biggest stakeholder and has a controlling stake in the company. In the beginning of January 2014, the company proposed its bid to acquire the remaining stake in Sirius XM, but nothing has happened on that front so far.
Sirius XM earns the majority of its revenues from the subscription fee it charges its subscribers. It offers various monthly, semi-annual, and annual plans to customers. The company also offers discounts on long-term subscriptions and on multiple subscriptions. As of now, the Sirius XM All Access package is available for $19.99 per month and the other basic packages are available at $14.99 and $10.99 per month.
Sirius XM in Cars
Sirius XM has contracts with nearly all major automobile manufacturers. Every year the firm pays out a large amount to its OEM (original equipment manufacturers) partners to keep their radios flowing into the new car market, at around a 75% penetration rate. Of these 75% who buy a car with satellite radio, 40%-41% choose to keep it after the promotion trial runs out.
General Motors: Sirius XM has a deal with GM which allows it to install their satellite radios in GM vehicles. This deal is valid till September 2020.
Ford: Sirius XM has an exclusive deal with Ford Motor Company which allows it to install its satellite radios in Ford cars until 2016.
- Sirius XM is also partner for companies like Toyota, Kia, Bentley, BMW, Volkswagen, Nissan, Hyundai, and Mitsubishi.
- Many trucks, boats, and recreational vehicles include Sirius XM radios as a standard fit.
Used car market becoming important for Sirius XM
Sirius XM mentioned at the end of 2015 that its penetration rate in the used car domain is around 28%, which increased to 31% by the end of 2016. The used car market is becoming attractive for Sirius XM and penetration could grow from current levels. This would present a strong opportunity for Sirius XM to exploit in the used car market. The company's management has stated that there are about 94.5 million satellite enabled vehicles in the country at present (2016), 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.
Pandora is increasingly pushing into the automotive segment, thus presenting a relatively new threat to Sirius XM. In January 2010, Pandora joined hands with Pioneer, an electronics manufacturer, to provide internet radio in cars. Companies like General Motors, Hyundai, and Toyota have announced plans to launch vehicles with new systems that will stream online radio from Pandora. Pandora has also developed relationships with major automobile manufacturers, including Ford Motor Company, Mercedes-Benz and MINI (BMW Group), and with suppliers of major automobile manufacturers, to integrate the Pandora service into current and future automotive sound systems.
Ability to afford unique content
Sirius XM's business model is based on a subscription fee, and therefore the company is able to afford unique and exclusive content that separates it from other radio services. The company will continue to sustain this ability and therefore, grow its user base. An example of this front is its recently renewed contract with Howard Stern, that would probably keep him associated with Sirius XM through to his retirement.
In addition to offering listening content through satellite radio sets factory-installed in cars, Sirius XM offers connected services to car manufactures through its subsidiary – Sirius XM Connected Vehicle Services Inc. The company provides an array of features to enhance safety, security, and convenience. These include remote and assist services, automatic crash notifications, easy access to maps, weather, restaurants and points of interests, scheduling service appointments, repairs etc. The satellite radio company has been in this domain for a while and it recently signed a deal with American Honda to provide next-gen connected services to Acura and Honda vehicles. Currently, Sirius XM provides connected services to Acura, BMW, Hyundai, Honda, Infiniti, Jaguar, Land Rover, Lexus, Nissan, Subaru, and Toyota. With new car sales increasing steadily, connected services should provide buyers an incentive to subscribe to Sirius XM services, which should keep its growth running. Coupled with the huge opportunity in the used car domain, this paints a pleasing picture for Sirius XM’s future.
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How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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