Shares of Sirius XM (SIRI: Charts, News, Offers) are currently trading at around $2 per share, the same price they were at three years ago in July of 2008, prior to the market crash which decimated its shares to as little as 10 cents in March of 2009. For investors who picked up shares at that time, Sirius has been an explosive growth stock, returning 2000% in a mere two years. For long-term investors, however, Sirius has been dead money – since hitting highs north of $60 in 2000, the dot-com crash crushed the company’s market cap to current levels, from which the company has failed to recover from. The excitement regarding the company’s primary product – subscription-based satellite radio – has waned considerably over the decade, as iPod and 3G/4G smartphone connected cars have made the idea seem far less futuristic and cutting edge as it did during its 1997 IPO.
The company competes with free services, such as web-based radio stations such as ShoutCast and regular FM stations. The arrival of HD Radio, a high-quality subscription-free service which requires the purchase of a HD Radio receiver, has also become another roadblock for Sirius. Can satellite radio survive as its technology is slowly but steadily being marginalized by better alternatives? Sirius has three avenues of growth – the automotive industry, premium content and an entry into the smartphone market.
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60% of new vehicles in the United States are equipped with Sirius XM receivers which come with promotional subscriptions. These per-installed receivers are critical for the company to sustain its influx of new subscribers. Analysts believe that as long as the auto sector sells over a million vehicles monthly, Sirius will be provided with the sufficient gross subscriber additions to retain positive net subscribers. Auto manufacturers install satellite radios in three OEM channels: leading, which indicates that the receiver is installed during vehicle production; point of sale, indicating that the receiver is installed as an optional add-on; and trailing, which indicates the receiver was installed after the vehicle’s purchase was initially finalized. Ford offers 6-month promotional subscriptions for Sirius satellite radio, after which customers can opt to convert to self-paying subscriptions.
Of the major auto manufacturers, Ford (F: Charts, News, Offers) has shown the most confidence in Sirius, opting for the “leading” approach, installing the receivers with paid-promotional subscriptions at the time of production. The market believes that Ford has more room to grow than market leader General Motors (GM: Charts, News, Offers), and Sirius will stand to benefit. Ford sold 16% more vehicles in the second quarter of 2011, from 495,844 to 575,994, and its market share increased from 16.2% to 17.6%. Strength in domestic automakers is expected to continue as disaster-struck Japanese automakers scale back global operations for the year. This bodes well for both Sirius and domestic automakers, who also receive a cut of the revenue on all installed satellite radios.
The threat of 3G/4G based radio, available in smartphone and media player compatible vehicles, as well as the government-backed HD Radio standard, are the real dangers that Sirius XM shareholders would like to forget about. Free services, such as ClearChannel’s “I Love Radio,” Pandora and Slacker applications for iPhone and Blackberry devices, stream high-quality Internet radio directly over 3G and 4G wireless connections. Major radio stations in the United States now simulcast in HD Radio, in a shift reminiscent of the nationwide conversion from analog to digital television. At some point in the future, FM radio will be phased out completely to make way for this new standard, and satellite radio will become marginalized as an obsolete and irrelevant technology.
To combat this stigma of being an obsolete paid service, Sirius touts its premium lineup of celebrities – such as Howard Stern, Opie and Anthony, Martha Stewart, Oprah Winfrey and Tony Hawk all have contracts with Sirius XM – and its exclusive sports programming contracts with the NFL, NBA, MLB, PGA, NHL and NASCAR, among others. However, these bloated contracts are very expensive and are weighing heavily on the bottom line. The company has also released mobile apps for the iPhone, Android and Blackberry platforms, which enable its satellite radio programming to be converted into streaming Internet radio. In addition, its streaming radio can be accessed from its website, www.siriusxm.com.
Finally, there are the relentless buyout rumors that have circled the company ever since its stock price plummeted three years ago. However, no potential buyers have surfaced, as buying out the company, now valued at $8.5 billion, would be more of a liability than an asset. Since Sirius XM is a merger of the only two North American satellite radio companies – Sirius and XM, there are no remaining competitors which would benefit from horizontal integration. All that is left are buyers that wish to vertically integrate – such as Microsoft (MSFT: Charts, News, Offers), Google (GOOG: Charts, News, Offers) or the automakers themselves – but the risk/reward ratio is too high and the acquisition would be too awkward for these potential suitors. Even at current levels, the stock is not cheap, trading at nearly 31 times forward earnings with a whopping price-to-book ratio of 41.3, signifying plenty of downside to this deceptively cheap stock.
Other News About SIRI
Sirius vs. Stern: The Battle Continues
A look at how costly “premium” content can be.
A Serious Look at Sirius XM’s Improving Fundamentals
Sirius is showing some signs of life.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
You forgot to mention Leo that data caps are being implemented by the major wireless carriers. Pandora and other internet radio will be gone. Soon. Also your 8.5 billion asset cap is incorrect. Liberty media holds 3 billion of that. FCF is rising rapidly. BTW, Leo you look awfully young.
I have to agree with Value. Leo you should work for S/A. You would fit right in.
Leo why did you delete Valuestocks reply. Your posting infactual articles.
Sirius, pushing forward.
Data caps are only recent (Apple) and very recent (Verizon). It’s likely Pandora, etc. won’t last forever, but they’re likely to last longer than Sirius. When Pandora falls, we’ll be looking at it as Sirius XM all over again”.
Also, the $8.5b figure is derived from market value, which is true. Liberty Media owning $3b is irrelevant to their market cap.
Update:
News after market close on Friday. Sirius will be included in Naz-100 beginning 7-15. The hurdles are getting lower Leo.
http://www.marketwatch.com/sto....._news_stmp