Is Sirius XM Going to $1.50?

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I'm not the only one feeling chipper about Sirius XM Radio's (Nasdaq: SIRI  ) prospects these days.

Barrington Research analyst James Goss is reiterating his "outperform" rating on shares of the satellite radio giant, but raising his near-term price target from $1.25 to $1.50.

It may be just a quarter, but it's a chunky 20% lift. Sirius XM has clearly come a long way since it teetered on the brink of bankruptcy last year, with its stock trading as low as $0.05 a share.

Goss' optimism is essentially what we've been seeing for months. Retail subscriber erosion is being more than offset by automakers selling cars with factory-installed Sirius or XM receivers. Sirius XM has 1.1 million more subscribers -- now at 19.5 million -- than it had at this point a year ago.

Churn is decreasing. Conversion rates are high. Initiatives for used car lots to push subscriptions on cars with inactive receivers are a potential goldmine.

Can Sirius XM really be worth $1.50? The higher that Sirius XM's stock goes, the more it relies on valuation than speculative momentum to justify its price swings. Let's peek under the hood.

Goss feels that Sirius XM can be generating $1 billion in EBITDA by 2013. What does this mean for Sirius XM investors? Well, let's work the math. Now that Sirius XM is profitable, Liberty Capital's (Nasdaq: LCAPA  ) 40% preferred share stake in the company is working its way into the income statement. This is why diluted shares outstanding popped to 6.4 billion in Sirius XM's latest quarter.

The satellite radio star has a liberal history when it comes to printing new shares, but that pace should slow considerably now that Sirius XM is somewhat self-sustaining. Let's allow for stock options and other issuances and go with a round 7 billion diluted shares outstanding come 2013. There is also roughly $3 billion in long-term debt. In other words, at $1.50 we're looking at a market cap of $10.5 billion on 7 billion shares and $13.5 billion in enterprise value (if the debt level remains constant). Trading at an enterprise value to EBITDA multiple of 13-14 -- three years out -- isn't cheap, but it's not outrageous for what is now the only game in town when it comes to premium radio.

Satellite television giants DIRECTV (NYSE: DTV  ) and DISH (Nasdaq: DISH  ) fetch far lower multiples, but they toil away in a cutthroat -- and some would argue, fading -- market. Satellite radio remains a realm of growth.

In reality, it shouldn't surprise anyone if Sirius XM is trading for quite a bit more than $1.50 come 2013. It would mean a stiffer multiple, but Goss is setting the $1.50 price as a near-term mark. Few investors would be up to sticking around with a volatile stock for the sake of 30% in capital appreciation over five years.

However, for Sirius XM to truly claw its way out of pocket-change pricing -- without a reverse split -- it will also have to evolve. Whether it means reaching out to more listeners (and this could be domestically or abroad where its satellites don't reach, but streaming initiatives will) or simply milking more out of its subscribers (either through higher monthly rates, beefed up advertising, or new revenue streams), it has to happen to keep the party going.

Either way, a lot of analysts are warming up to satellite radio with valuation models to justify their enthusiasm.

You've come a long way, Sirius XM.

Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Longtime Fool contributor Rick Munarriz is a subscriber to both Sirius and XM. He does not own shares in any of the stocks in this article. He is also a member of the Rule Breakers analytical team, seeking out the next great growth stock early in its defiance. The Fool has a disclosure policy.

Read/Post Comments (14) | Recommend This Article (22)

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  • Report this Comment On September 24, 2010, at 11:56 AM, themaxpain wrote:

    Seems Sirius' $6-7 billion in NOL's, the potential to raise prices slightly in 2011, and the new-found ability to refinance debt at lower rates should - well before 2013 - simultaneously help to pay down the $3 billion in debt and grow EBITDA from the current $700 million to well over $1 billion.

    A 50% pay down of debt over the next three years, combined with a likely 50-100% increase in in EBITDA in the same, should substantially lower enterprise value to EBITDA multiple estimates in that time frame.

    Considering a steady climb out of the recession and improving auto sales, and only $1.50 in 2-3 years seems laughable.

  • Report this Comment On September 24, 2010, at 1:02 PM, m55555 wrote:

    you are right sir

  • Report this Comment On September 24, 2010, at 1:21 PM, waterinfo wrote:


    Before 1930, zero percent of all automobiles had radios. In 1930 Paul Galvin, owner of Galvin Manufacturing, Inc., which built certain electrical components for automobiles, developed the first AM auto radio, consisting of a box about the size of a carry-on suitcase, a control console mounted on the dashboard, and a speaker, large enough to put the woofer in your $10,000 audio system to shame. He installed this equipment in his personal auto and demonstrated it at a trade show in Atlantic City. The attendees were impressed, and over the next few years, Galvin’s technicians toured the country installing “Motorola’s” in private autos. Within a few years, auto radios were an option from every auto manufacturer, and when auto production resumed after World War II, nearly every car built had an AM radio installed.

    In the 1960’s the first FM radios, or more correctly AM/FM radios were added to auto option lists. Initial acceptance was slow, but by 1980 essentially every auto radio was AM/FM.

    In the 1970’s auto sound systems had no music reproduction (e.g. tape) player. 8 Track cartridge players, and soon thereafter 4 Track Cassette players were introduced and by the mid 1980’s nearly every auto sound system had a “tape” player.

    In the 1990’s CD players were introduced, and again, after relatively slow acceptance, eventually, by 2000 reached the point that they were standard equipment with nearly every auto sound system.

    In the early part of the new millennium, Sirius Radio and XM Radio introduced the concept of satellite broadcast, targeted to the auto sound system. Despite the epic battle between these two, very well capitalized new ventures, acceptance was slow, and turf battles between the two providers left potential customers confused, and reluctant to commit to one system or the other. Fortunately, by 2008, both companies, and the U.S. Government (both the Federal Communications Commission and the Justice Department) agreed that the only way for satellite radio as a broad based consumer service to survive was to permit the two companies to merge.

    Acceptance of the “paid” satellite radio subscription, having been previously targeted primarily to “premium” priced automobiles, began to find acceptance across the full spectrum of auto manufacturers. The combination of the two companies removed purchase decision obstacles from most consumers, as the channel list merged, and a “complete” service was available with the satellite radio from any auto manufacturer.

    Now, in late 2010, SiriusXM subscribers number close to 20,000,000, and nearly every auto sold in the US has SiriusXM radio either as standard feature, or alternatively as a very low cost option, except maybe Porsche, who still has the nerve to charge $750 for the SiriusXM option. Of course, I’ve yet to see a 2010 or 2011 Porsche on any dealer’s lot that does not have that option installed already.

    In most cases, the delivery of a new auto with SiriusXM installed includes an initial trial subscription, and one of SiriusXM’s greatest challenges is to get essentially all of those trials to turn into revenue paying customers. However, even with a new car sales rate as low as 12 Million units per year, and even with a conversion rate 80% of trial subscribers, SiriusXM should have a subscriber count close to 100 Million by 2020.

    What about revenue? Right now SiriusXM is seeing gross revenue of only about $120/year per subscriber. Since subscription fees are much more than $10/month, where is the rest of the revenue? It is “free trial” subscribers, and in the subscribers that have been offered very aggressive incentives to keep their radios active. Over time, these incentives will not be needed as user’s perception of Satellite radio becomes more like consumer perception of Cable/Satellite TV. If someone tells you that they have no cable or satellite system at home, you probably think that they are lying!

    By 2020, it is more likely that gross revenue per subscriber will exceed $200 per year (current dollars) and not even close to the current value of $120. So by 2020, total revenue of $20 Billion would not be unrealistic. And this does not even include revenue from equipment sales (e.g. home receivers), from special “pay per hear” broadcasts, from auxiliary services (such as weather, routing, traffic, etc), or most of all, from additional advertising revenue from non-commercial free channels, which, if SiriusXM is smart, will be made available to anyone who has the receiver but chooses not to subscribe to the paid service.

    What kind of profit could be generated from a $20 Billion revenue stream? Cost of revenue (which I guess is heavily royalty and talent based) certainly shouldn’t increase by more than 25 or 30 cents for each new revenue dollar. Let’s assume 30 cents. Thus, revenue increase of $17 Billion (from today’s revenue levels) should increase the cost of revenue by about $5 Billion. R&D might increase from about $120 Million today to $400 Million. SG&A, currently running at about 20% of revenue should drop to no more than 12% of revenue, or about $2.4 Billion. All other expenses, currently running about 10% of revenue should drop to no more than 5% of revenue, or about $1 Billion. So let’s look at the top level income statement, circa 2020 for SiriusXM:

    Dollar amounts in Millions:

    Revenue $20,000

    Cost of Revenue $ 6,400

    Gross Profit $13,600

    R&D $ 400

    SG&A $2,400

    All Other $1,000

    EBITA $9,800.

    By 2020, Sirius XM should be generating nearly $10 Billion in cash flow before interest and taxes. Now for the really beautiful part of the SiriusXM business. Unlike cable TV, unlike internet services, unlike wireless phone services, unlike terrestrial wireless entertainment services, new subscribers to SiriusXM services use no additional resources from the Sirius system. The same radio signals that serve 1000 subscribers will serve 1,000,000 subscribers. And the same radio signals that serve today’s 20 Million subscribers, will in principle, serve 2020’s 100 Million subscribers. In essence, given the large capital investment in today’s SiriusXM systems, the future capital cost per subscriber is very low. Most future capital costs will be used to add additional services, facilities, and programs, each designed to generate additional revenue. It is beyond the scope of this brief analysis to estimate SiriusXM future capital needs. But suffice it to say, that a company with an EBITA of nearly $10 Billion per year should have no trouble financing additional future capital needs. Even if today’s interest expense of about $300 M per year were to increase to $1 Billion per year, the SiriusXM operating profit by 2010 should be on the order of $9 Billion, or about $2.30 per currently existing SiriusXM share.

    To get from today’s nearly break even operating income, to an operating income of $2.30 per share, in a relatively smooth trajectory over the next 10 years, would represent a profit growth rate of more than 30% per year. What might the stock market pay for a company growing profits at more than 30% a year, with a huge, relatively captive customer base? Twelve time earnings, twenty, maybe forty? Even at twenty times earnings, SiriusXM shares in 2020 should be selling for at least $46 per share. Spread evenly (which of course it never would happen that way) means that the shares should increase an average of $5 per share per year between 2010 and 2020. More likely, once the investing public realizes what a gem SiriusXM really is, the multiple will probably jump to 50 or 100 times soon, and taper off toward a multiple of 15 or 20 times by 2020.

    Like Galvin’s first “Motorola”, SiriusXM was, in most ways was ahead of its time. But, it’s time has come. Now, if customer services could only be made as good the programming.

  • Report this Comment On September 24, 2010, at 1:32 PM, Fredlee009 wrote:

    Wow, Nice post. Hard to follow that. Not a post, its a classic article sir.

    I was simply going to say reading anything now from this author (in my opinion hes terrible) just makes me sick, bullish, bearish doesnt matter anymore. All bs to me. Just hush, and enjoy the show Rick. Sirius XM is going up whether you like it or not, based on what they have already accomplished as well. Nice try.

  • Report this Comment On September 24, 2010, at 1:52 PM, Austin77478 wrote:

    Rick, what shall it profit a man, if he continues to bash Sirius?

  • Report this Comment On September 24, 2010, at 4:41 PM, WoodyDog1400 wrote:

    No, it is not going to $1.50

    It is going to $2.00. see you there.

  • Report this Comment On September 24, 2010, at 5:20 PM, multi007 wrote:

    I bought at .54 cents a share. When should I sell? Everyone talks about when you should buy, but I dont see people saying things like "If it hits $3, or $4 or $8 you should sell?"

  • Report this Comment On September 24, 2010, at 5:22 PM, multi007 wrote:

    FYI - not that many people know about this, but SIRI offers lifetime subscriptions. At around $550 per car (that can be transfered to your new car up to 3 times for free) it would take about 3.5 years to break even. This will undoubtedly result in a loss of revenue. I wonder though if this would hit SIRI bottom line hard.

  • Report this Comment On September 25, 2010, at 12:04 AM, mp37421 wrote:

    I see it going beyond $2.

  • Report this Comment On September 25, 2010, at 12:24 PM, ThongLover854 wrote:

    With q3 and 4 bound for greatness and then nothing but increase in subs in 2011, I see SIRI near $1.50 by end of year and $2 by next summer.

    Then late next year price increases and SIRI 2.0 comes out. By mid 2012, this is a $3 stock with $1 billion less debt than now...

  • Report this Comment On September 25, 2010, at 7:14 PM, Pantaloon007 wrote:

    I was in long in 2005, and am now. The only time I was really worried was the end of '08, and that was that I would have to tighten my belt enough to quit buying. I'm not some huge investor, and am PURELY speculative. But I just liked the SatRad idea from the start so I bought in. That simple. I'll hold it until it is on par with other entertainment delivery options, and if get that lucky, which is all I'm claiming to be, then I can smile and say my instincts were good for a change.

    Sometimes a good idea is just a good idea, and sometimes it's one backed by a s-load of money. SIRI was the latter, and that was better than all the EBITDA's in the world to me.

  • Report this Comment On September 25, 2010, at 7:26 PM, doubting wrote:


    Yours is a BRILLIANT PIECE. Not because it is so interesting in content and encouraging for siri lovers and discouraging for siri bashers but rather because it is truly SENSIBLE. You may miss this or that number but the essence makes 100% SENSE. If someone wants to be right today or predict tomorrow, you need to understand HISTORY. Everything in life, including society, is cyclical rising at each stage in its evolution simply to a different quality level. What we have seen so far regarding siri is a quantitative accumulation that at some point in time (that appears to be today) leads to a qualitative jump. This jump in the case of siri is brand recognition that is taking place as we speak. Satellite radio in an automobile is becoming a MUST not because it is trendy or in vogue but rather because it is a great product and the only true alternative to BAD (terrestrial radio). We could use another comparison with Apple that took about ten years to rocket the stock from $3 to $200 after Job's return. This was due to a host of factors from the genius of Job's focus, direction and management to timeliness of their products. Siri is just at the beginning of its historical rise. It was great fun reading your article.

  • Report this Comment On September 25, 2010, at 7:35 PM, doubting wrote:


    Goss is so wrong about siri generating EBIDTA at $1B by 2013. What about at least $1.3B EBIDTA and $1.0B fcf. These are not my but rather Mel's numbers who normally low balls them. I tend to believe that siri is on a pace of $700M EBIDTA in 2010. We will not have to wait long to find out who is wrong and who is right - just a month or so to see siri 3Q results. I just wonder what Goss is going to say when a layman like me outdoes him in the correctness in professional predictions. May be they will offer me his job???

  • Report this Comment On October 01, 2010, at 12:42 PM, wrtmania wrote:

    I dunno....

    I have one of those cars with a Sirius/XM radio and I never bothered to activate my free trial. I've had horrible experience dealing with their customer service (I tend to be an 'early adopter') and never went back. Then after my 'free trial' was over, they started sending me a LOT of mail trying to get me to 'keep my account active'. Even at bulk rates, they've spent more on me in the past 6 months than I'm ever likely to spend with them as they don't even seem to know that my account was never activated. They know my name and address, they know I have a radio capable of receiving their signal, but they didn't put it together that I wasn't getting their signal? I wonder how many other folks haven't activated the service? I'm just sayin'....

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