VALUATION HIGHLIGHTS

1. Advertising constitutes 54% of the Trefis price estimate for Sirius XM Radio's stock.
2. Satellite Radio Subscriptions constitute 32% of the Trefis price estimate for Sirius XM Radio's stock.
3. Equipment, Royalties and Other Revenues constitute 14% of the Trefis price estimate for Sirius XM Radio's stock.

WHAT HAS CHANGED?

1. SiriusXM Q3 Earnings Snapshot

SiriusXM reported an earnings-per-share profit of $0.06 excluding non-recurring items versus consensus analyst estimates for a profit of $0.05, a $0.01 beat. Revenues grew 0.07% year-over-year (y-o-y) to $2.02 billion, beating analyst estimates for $1.94 billion. The company added 169K net new self-paid subscribers, topping the 124K loss that analysts expected. The monthly churn was 1.7%, flat on the prior year's quarter. In addition, monthly ARPU was up 2% y-o-y with the subscription component up 3%.

2. Updated SiriusXM 2020 Guidance

SiriusXM's new guidance implies that it will finish the year with self-pay net additions close to 90% of what was originally projected before the pandemic. The company expects self-pay net subscriber adds of approximately 800K (prior estimate: +700K), total revenue of about $7.85B (prior: $7.7B; consensus: $7.78B), adjusted EBITDA around $2.475B (prior: $2.4B; consensus: $2.43B), and free cash flow of $1.6B (consensus: $1.67B).

3. Pandora Acquisition

Sirius XM completed the acquisition of Pandora for $3.5 billion in an all-stock deal in early 2019. The deal made the combined entity the world's largest audio entertainment company. Further, it would give the satellite radio company entry into the well-established media streaming market. The merger should unlock music streaming services for cars. This deal holds great potential for both companies as it could bolster their positions in segments where they are currently lacking. Pandora's technological competence should help Sirius XM expand beyond vehicles and streamline its features like personalized recommendations. Concurrently, Sirius XM alliance with several automakers should accelerate Pandora's distribution to vehicles and unlock music streaming services for automobiles.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

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 35.8 million in 2019 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 61 million by the end of the Trefis forecast period, there could be an upside of about 18% 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 - aided by the Pandora deal. On the other hand, if competition from Spotify and other radio/online audio streaming services increases and the subscriber additions slow down amounting to current levels by the end of the Trefis forecast period, there could be a little over 15% downside to the Trefis price estimate.
• Sirius XM's Average Revenue Per Subscriber: We currently forecast this figure to increase from $171 in 2019 to about $182 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 $200 by the end of the Trefis forecast period, there could be an upside of about 13% to the Trefis price estimate.

BUSINESS SUMMARY

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.

Sirius XM completed the acquisition of Pandora in Februrary 2019, making it the world's largest audio entertainment company. Additionally, the acquisition should give the satellite radio company a greater presence in the streaming market and should accelerate Pandora's distribution to vehicles and unlock music streaming services for automobiles - given Sirius XM's alliance with several automakers.

SOURCES OF VALUE

Subscription fee

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 $20.99 per month and the other basic packages are available at $15.99 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, 39%-40% 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. In addition, The company also announced a significant expansion of its 360L platform at General Motors, this should further drive penetration.

• Nissan and Infiniti:

  Sirius XM's deal with Nissan and Infiniti should further boost its connected vehicle business. This would allow it to install their next generation platform to all Nissan and Infiniti vehicles and should enhance the new car penetration rate. This deal is valid until 2022.

• Toyota:

  Sirius XM has a deal with Toyota which allows it to install their satellite radios on all Toyota vehicles in the United States. This should help drive new car penetration this fall in model year 2020 vehicles. Further, this deal is valid until 2028.
• Sirius XM is also partner for companies like Volvo, Mercedes-Benz, Honda, Ferrari, Kia, Bentley, BMW, Volkswagen, Hyundai, and Mitsubishi.
• Many trucks, boats, and recreational vehicles include Sirius XM radios as a standard fit.

KEY TRENDS

Used car market becoming important for Sirius XM

Sirius XM mentioned at the end of 2017 that its penetration rate in the used car domain is around 35%, which increased to 40% by the end of 2018. 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. 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.

Increasing competition

On-demand music streaming services are currently dominating the market, with Spotify being one of the leading players. Spotify had about 207 million Monthly Active Users (2018) globally, far ahead of its nearest rival Apple Music and continues to add more subscribers - driven by expansion into new markets. Further, connected cars that allow smartphone apps to stream seamlessly through Bluetooth should dampen the subscriber growth in premium-priced satellite-beamed platforms. However, Sirius XM has seen steady growth in recent times. This coupled with the acquisition of Pandora should allow Sirius to counter this competition.

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.

Connected services

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.