Sirius XM’s Primed for Growth But Its Priced In At $2.25

by Trefis Team
Sirius XM Radio
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Sirius XM (NASDAQ:SIRI) had a good year last year zipping past its own subscriber guidance and growing revenue in the process. The company that reported losses just 2-3 years back is now poised to significantly grow its profits in near term. With a robust subscription model and successful sales channel of new and pre-owned vehicles, we expect Sirius XM to grow its free cash flow by more than 60% in 2012.

Does that imply significant room for growth in stock price as well? We don’t believe so as our current price estimate for Sirius XM stands at $2.26 in line with the market price. We believe that the market already reflects the expected growth in Sirius XM’s business. Sirius XM’s equipment is primarily installed in vehicles manufactured by the companies such as Ford (NYSE:F) and GM (NYSE:GM).

See our complete analysis for Sirius XM

Sirius XM’s Expected Growth Is Quite Apparent

Sirius XM has stated that it expects to gain about 1.3 million net subscribers in 2012. Given that the company was quite conservative in its guidance in 2011 and the fact that vehicle sales are expected to rise this year, we forecast slightly higher net subscriber gains of close to 1.36 million. In addition to this, we forecast that the company will gain on an average 1.33 million subscribers per year over the course of our forecast period.

The key point to note here is that our estimates already incorporate the continuation of the momentum that Sirius XM can witness in 2012. This expected growth is no news for the market. Several analysts have been vocal about Sirius XM’s robust subscription model and the expected growth in subscribers, cash flows and earnings. We believe that Sirius XM’s trajectory is more or less apparent to the market and is something similar to what we expect. We do not see any strong catalyst that can significantly alter this trajectory.

Risks – Potential Competition & Increased Prices

Sirius XM, although currently a very popular choice for vehicle owners, faces some threats in the future from radio services such as Pandora (NYSE:P) and Clear Channel Radio with its enhanced personalized service that will look to push further into the automotive market. The downside to Sirius XM is that it is heavily dependent on the automotive channel and therefore needs to watch out for developments in this arena.

Furthermore, we are yet to see the impact of price rises in 2012 which is the reason why Sirius XM is staying conservative in its net subscriber growth guidance. Although we believe that the impact should not be material, other companies such as Pandora have chance to utilize this phase and market their services to vehicle owners. If they do that successfully, Sirius XM can see reduced subscriber growth.

Given that Sirius XM is heavily dependent on automotive channel, number of automotive subscribers is the prime stock driver. There can be an upside of about 20% to our price estimate if Sirius XM can reach a subscriber base of about 35 million by the end of our forecast period.

On the other hand if the automotive subscriber additions slow down with total automotive subscriber base  amounting to just 20 million by the end of our forecast period, there could be more than 15% downside to our price estimate.

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