Will Sirius XM Stay Mediocre in 2016 as Well?

Sirius XM (SIRI) has been a range bound stock for many years, but this year the stock can move a lot higher. Sirius XM’s strategy of shifting its focus from new-car buyers to used-cars buyers will conspicuously support the company to move forward. Sirius XM shared strong fourth quarter results which show that the company is headed in the right direction.

For the past few years, Sirius XM was able to witness strong customer growth by dealing with car manufactures to install its technology in their vehicles, and then proposing free trials to new car buyers.
This trend has performed well for the company, but it has an inadequate life span as the key driver of customer growth.

Sirius XM’s technology is used in almost 75 percent of new vehicles, which is a lot better than what the company's management had projected. However, it is highly likely that this figure will not surge more than this, merely for the reason that the economics would not support it.

Installing satellite technology in new cars involves huge money, and Sirius XM desires to see a return on that outlay. Therefore, Sirius XM chose to pay attention to the higher models of vehicles, where buyers have more disposable earnings and are ready to start paying for Sirius XM’s service when their trial finishes.

Apart from this, Sirius XM has also been making an effort to grasp a strong hold in the used car market, as installing satellite technology in subcompact models would not generate a huge return on investment. Sirius XM lingers to make a network of used-car dealerships that propose Sirius XM trials. Those dealerships now stand at over 19,000 units, outperforming the executives' estimate. However, that is still about half of the dealerships out there, so the company should be able to carry on increasing that figure.

On the other hand, subscriber acquisition costs for Sirius XM surged around 8 percent in the previous year, and outstripped the yearly growth in subscriber top-line by a very small difference. But that margin enlarged in the recent quarter, when the expenses related to landing subscribers outperformed the growth of subscription top-line by around 12 percent to 7 percent. If the trend endures, it would shake the entire margins and will consume Sirius XM’s cash.

That being said, I do think Sirius XM will benefit from targeting the used car segment and high-end car owners who have more disposable income. If the company manages to tap those two markets without growing the customer acquisition cost, it can break the range barrier this year.
Published on Mar 18, 2016
By Akshansh Gandhi

Copyrighted 2020. Content published with author's permission.

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