Sirius XM Radio in 2014

I've got a time machine, and I'm not afraid to use it.

I'll be taking treks to 2014 -- for amusement purposes, naturally -- to see what some of the more popular companies that I follow are up to in the future. I checked out China's leading search engine yesterday. Today, I'm pumping up the volume on satellite radio giant Sirius XM Radio (Nasdaq: SIRI  ) .

Channel 2014 on your satellite radio dial
It's been a whirlwind three years for Sirius XM. The media giant hit 23 million subscribers during the summer of 2014. That may be a little slower than bulls had predicted when Sirius XM barreled through the 20-million mark in December 2010, but there were a few hiccups along the way.

A rate hike in late 2011 ran into some resistance, with a temporary uptick in churn. Most new cars are also rolling out with dashboard gadgetry that delivers free Internet radio, real-time routing, and other forms of ear candy to owners of smartphones at reliable speeds and sonic quality -- even to those tethered to older 4G handsets.

For satellite radio, however, the picture's not as bleak as it seems. Sirius XM is making more money off its subscriber base, and not just from the slightly higher monthly rates:

  • A website makeover in 2012 transformed its ho-hum channel pages into sticky social-networking hubs. Vetted artists pay for the right to sell tracks, concert tickets, and other merchandise. Display advertising fills in the monetization gaps.
  • Interactive receivers provide new revenue streams. Liberty Capital (Nasdaq: LCAPA  ) -- still clinging to its 40% preferred share stake in 2014 -- helped broker a deal with Liberty Interactive's (Nasdaq: LINTA  ) QVC for satellite radio's first shopping channel.
  • Taking a page from TiVo's (Nasdaq: TIVO  ) playbook, interactive receivers also allow Sirius XM the ability to sell song downloads or whatever talk guests are pitching, and let users request more information from advertised spots. Obviously, advertisers pay more for these sponsored opportunities.
  • And copying off Netflix's (Nasdaq: NFLX  ) playbook, Sirius XM is using streaming as a more feasible international expansion vehicle  The service is just getting off the ground in select countries. There are licensing hurdles and ad-supported competition, but it's at least helping with global brand awareness.

Rolling with the changes
Sirius XM still has friends in the automotive assembly lines. When General Motors (NYSE: GM  ) became an initial XM investor, and Ford (NYSE: F  ) became one of the first to back the factory installation of Sirius receivers, they didn't do so out of the kindness of their Michigan-sized hearts.

Automakers have always received royalties from Sirius XM, and those payouts for active subscribers continue in 2014. New and certified pre-owned cars come with shorter trials, and despite wireless alternatives to radio, the stakes are high enough that Ford, GM, and the rest of their car-assembling peers still find ways to market Sirius XM 2.0 receivers, which make it easier to access both Sirius and XM.

Ford and GM have much healthier balance sheets in 2014 than they did years earlier, but financial incentives still matter.

Milking the tax advantage
Sirius XM has been consistently profitable through 2014, but it still has billions in tax-loss carryforwards at its disposal.

Margins have gradually improved at its flagship business, but this still isn't the high-margin scalable model that some bulls had been hoping for.

To make the most of its ability to offset gobs of future tax bites, Sirius XM continues a strategy that began with its push for high-margin online ad revenue in 2012. It's been making tactical acquisitions of earnings-accretive companies. Sirius XM even made a play for Pandora shortly after its late 2011 IPO, but sticker shock drove the satellite radio giant to opt for smaller upstarts -- in everything from streaming to digitally savvy artist management -- that were already in the black.

The company's bankrolled those buyouts through stock and free cash flow. Sirius XM has actually been able to shave some of its debt, though refinancing is no longer the nail-biter it was in 2009.

What else am I forgetting? Oh, Sirius XM never declared a reverse stock split. Its stock never fell below $1 again. By the spring of 2013, it also never dipped below the $2 mark. The stock isn't the blazing winner it was in 2009 and 2010, but it has been able to beat the market through 2014. Investors have replaced speculators, and the stock no longer routinely tops the most actively traded or shorted stocks.

Sirius XM is here to stay, and investors in 2014 won't look that kind of gift horse in the mouth.

Have a different take? Where do you see Sirius XM in three years? Share your thoughts in the comment box below.

General Motors is a Motley Fool Inside Value recommendation. Ford Motor and Netflix are Motley Fool Stock Advisor choices. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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, except for Netflix. 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 (20) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 19, 2011, at 10:56 AM, rayzur9 wrote:

    Free Internet "anything"? How long does that last? It has to cost something for operations, even if the pipeline were free, people will not work for free, and advertisements OH wait, SIRI is already making serious $$$ on advertisements on some of its advo-friendly content. I have been an XM sub since 2003. Ive listened to Pandora, and you get five songs then an ad, five more, then an ad, pause, ad pause ad---nauseum.

    Siri subs challenge the biggest Sub corps in the world, DishTV, DirecTV, two of which are losing ground due to extremely poor customer service.

    However, the SEC and FTC need to take a look at who is keeping this withing the 3 cent trading range for months on end.

  • Report this Comment On January 19, 2011, at 10:58 AM, rayzur9 wrote:

    Oh YEAH, one more thing, Who owns all those old Worldspace satellites? Hmmmmm?????

  • Report this Comment On January 19, 2011, at 10:59 AM, christheboy wrote:

    Good article. . .very creative to 'look into the future'. . .i agree with our writer. . .SIRI is losing its vegas style investor and replacing them with serious investors looking for a stock with longevity. You can tell b/c the volumes and the price swings are steadily coming under control. Recently, I had the opportunity to use Pandora. . .I always thought that it was a big competitor. . .though now I realize, they are for different users. . .Siri is for the traditional music/radio listener. Songs, genre stations, talk radio, etc. . .Pandora is for users that are into music. . .different bands with similar sounds. . .quite cool. Like its name, once you get started, it is hard to stop, opening up a vast new library for your ears. They are very different. I will say that Siri is the better option for most of the gereral public. Most people like music, but few are ready to put that much time and energy into music 'discovery'. I see Siri in the mid $2's by next x-mas. . .it is sitting too pretty with possible write-offs, continued installation by MAJOR auto makers (especially highend outo makers BMW< Cad, etc), Sat radio is here to stay, and make us investors, some SIRI-ouse coin!

  • Report this Comment On January 19, 2011, at 12:38 PM, diggi24 wrote:

    Lets not forget that when the platform for internet is laid into automobiles and it acutally works without buffering...Sirius can up their servers or hire a cloud company to host for them. They have the capabilities of internet radio as well as sat. Most importantly, they have the content. They can cut a bit of operation costs by not routing their content through sat. They can stream with the rest of them. Mel will figure it out. Stick with SIRI. Any company with a 20 million subscriber base and good content can adapt to changes in delivering their content as they have already with the smartphones. I mean, come on, do you really think all of your phones have sat raido built in? No, its being streamed, just like Pandora.

  • Report this Comment On January 19, 2011, at 2:24 PM, investchief wrote:

    Sirius has had a bumpy few years for sure but since cars are no coming equiped with Sirius, they will benefit greatly from the recovering car market. Now they have to focus on the alternative sources: internet, handheld, etc. Howard Stern and new car stereos are keeping Sirius afloat and ultimately Sirius must make changes to its other services to attract more subscriptions.

    check out my blog: http://investchiefblog.com/

  • Report this Comment On January 19, 2011, at 2:30 PM, my2cents4u wrote:

    I've got a time machine, too, and I'm not afraid to use it either. This one goes forward and backward.

    2007-2010: Several articles from RIcky predicting the impending demise of Sirius and it's business model.

    2011 and beyond: Ricky will slowly eat his words and

    a. move on to bash other stocks for fun and profit.

    b. come out of the Sirius closet and reveal that he was a fan all along.

    Motley Fool needs to look hard and close at it's bloggers' motives and actions before it becomes a complete joke like that Cramer clown on TV.

    BTW, I remember when Juno offered e-mail accounts to everyone at no cost; their motto used to be "Because e-mail was meant to be free". I haven't seen that motto for several years now. Pandora will not be free forever, either.

  • Report this Comment On January 19, 2011, at 3:00 PM, MusiCali wrote:

    2 cents.

    from your post:

    "a. move on to bash other stocks for fun and profit."

    while I agree with you that the fool has been wrong on siri I do not believe they would ever write an article to pump or dump a stock because of a position they or someone they knew could benefit. David and Tom Gardner would never stand for that sort of behavior under "their roof".

    JMHO

    Long Siri

  • Report this Comment On January 19, 2011, at 3:01 PM, baldheadeddork wrote:

    "Interactive receivers provide new revenue streams. Liberty Capital (Nasdaq: LCAPA) -- still clinging to its 40% preferred share stake in 2014 -- helped broker a deal with Liberty Interactive's (Nasdaq: LINTA) QVC for satellite radio's first shopping channel."

    A radio shopping channel. For everything you buy that you don't care what it looks like.

    It's only Wednesday and I know that is going to be the funniest thing I'll read all week.

  • Report this Comment On January 19, 2011, at 4:09 PM, feebeepug wrote:

    Is there any chance at all that SIRIUS could be a $30-$35 stock in (3) years???

  • Report this Comment On January 19, 2011, at 4:15 PM, SocalChris wrote:

    Here's a different view:

    XM 2014

    Sirius/XM has consolidated into 1 platform--XM, making it simpler for consumers to understand. This also provides cost synergies and allows XM to use both SIRIUS and XM satellites to deliver multiple levels of service generating different revenue streams. More below....

    XM offers subscription-based services available through multiple receivers--in dash, stand alone, smartphone, or streaming into any computer or hand held device. These services include everything from sat radio, to GPS, to spoken word books, to video streaming, and more.

    XM offers free sat radio as well, which can be activated in any existing in dash receiver, capitalizing on the huge used car market, or streamed into any device. Free sat radio has commercials, and ad revenue from these channels is a significant revenue source for XM.

    Sat Rad 2.0 offers hugely advanced user interfaces, and allows users to customize playlists, and organize channels according to music genre or artist, or even local preferences. All of this is managed through a completely revamped website, similar to iTunes.

    In fact, XM has partnered with iTunes, and users of XM can easily tag and buy music or videos seen or heard on XM through their iTunes accounts. XM gets a kickback of course, if those items are bought through XM, generating yet another new revenue stream.

    Along with Sat Rad 2.0, and free from rate increase restrictions, XM fine tunes pricing for it's tiered service plans, which result in higher average revenue per subscriber at very profitable margins with minimal additional costs.

    By the way, the economy is improving, SAAR is way up, and XM is now offered as standard equipment in the majority of new cars sold in the US. Consumers expect new cars to have XM, it is no longer considered a luxury option.

    And overseas, XM has smartly decided not to over-reach and go for global domination, but has focused on 1 country: China. XM China launches in 2012 using US channels as a baseline, with Chinese content added at minimal cost to XM. XM China is wildly successful. It blows away all expectations while ramping up earnings beyond any previous expectations of a US-focused XM business model.

    RE XM's balance sheet: With no significant CAPEX from 2012-2015, skyrocketing revenue and no tax liabilities, XM has increased FCF dramatically. XM has met all debt requirements through 2014, and retired some debt earlier than required. Debt for 2015 and beyond has been refinanced and possibly pushed out at dramatically lower rates, and poses no risks.

    XM continues a stock buyback program that started in 2013, and continues to elevate the stock price by pulling significant amounts of shares off the market.

    By the way, by 2014 Pandora is dead. An IPO in 2011 quickly fizzled by 2013 and the company declared bankruptcy and disappeared the way of Napster.

    Internet radio exists, but XM offers superior features, at prices that beat internet radio costs, once data plan pricing is taken into account. XM has become the iTunes of radio.

    As for the stock price, I'm not a financial guru, so I won't speculate on an actual number. But if the vision I outlined above comes true, it wouldn't be impossible to see the stock price above $10, as aggressive as that sounds now. Maybe even close to $20? Who knows.....

    Just another point of view to consider....

  • Report this Comment On January 19, 2011, at 4:28 PM, ItAintCool wrote:

    Rick,

    You think Pandora will have a huge I.P.O.? Perhaps at the launch, but watch as they get hammered by the shorts (Market Makers and Terrestrial broadcasters) who will drive the stock down to the Pink Sheets. Terrestrial radio doesn't want internet radio to succeed any more than they wanted SIRI to succeed.

    Nothing that has been revealed about Pandora has proven it to be a viable business model. Free Internet Radio is not going to be free due to lack of net neutrality. Any factory-installed internet radios will have a monthly rate of $25-$50 a month for their data plan. (compare that to the predicted price hike of Sat Radio - my guess, of an extra $2 - $3 a month by end of 2011, making it $15 a month for better programming and better signal). And Pandora may still have to charge for its services in order to sustain itself on top of whatever data plans you may pay.

    @Brian326

    You should read more articles posted in the last few weeks about SIRI by MF writers.

    While I won't say Rick is a SIRI basher (At least not for the past 2 years), I will say there is a recent deliberate and concerted effort by MF writers to pump Pandora for it's inevitable IPO. Just search the for articles on SIRI in the past month and you'll find a ton of writers pumping Pandora and/or telling you to dump SIRI (even today's 7 Stocks You Need to Watch). Many MF writers who promote Pandora use hyperbole rather than facts to support their argument. And the facts they do use on Pandora are stretched very thin to make the company seem more of a threat than the paper tiger it really is. And those same articles predict SIRI's demise because they think Pandora will be the SAT-Radio killer.

    Even this article by Rick has it's deliberate message about Pandora: "Sirius XM even made a play for Pandora shortly after its late 2011 IPO, but sticker shock drove the satellite radio giant to opt for smaller upstarts". You don't think that retail investors don't take all these signals into their head and think that Wall Street is big on Pandora? They do. They'll invest with doing proper due dilligence. Sadly the retail investors will be taken for a ride as the MM's short it to BK.

    Long on SIRI

    Short on MF

  • Report this Comment On January 19, 2011, at 4:44 PM, ItAintCool wrote:

    feebeepug wrote:

    "Is there any chance at all that SIRIUS could be a $30-$35 stock in (3) years?"

    Honestly, I don't think so. But a $10-15 stock, most definitely.

    I think Rick's subscriber figures for 2014 is kind of a low ball figure. I can easily see 25 million subscribers, if not more by 2014. I think people are underestimating the success of the SIRI's own smart phone app, which now has everything people wanted in the first place (Music, News, Sports, Howard Stern). And with a rate hike for of at least $2 per month means that SIRI rakes in another $40 to $50 million a month, which gives them an extra half-billion dollars or more per year in revenue. That will allow the company to pay off its entire debt before 2015 and allow for a stock buyback. These are the 2 main issues that vocal critics of SIRI have attacked it for so long (debt and too many shares outstanding). The removal of debt and buyback of shares will drive the stock into the $10 range.

    But if and when SIRI can generate 30 million + paid subscribers, which will create enormous revenue and profit (maybe even dividends), I do expect the stock to get into the $30 a share range. I am skeptical if it will happen in the next 3 years though.

    If you want a stock to plan your retirement on in the next 10 years, SIRI is something you need to add to your portfolio now.

  • Report this Comment On January 19, 2011, at 5:20 PM, dan0136 wrote:

    i have a time machine also and it shows 23.5 million subs by the end of 2011.Also nobody blinked @ the small rate hike churn was lower and revenue was much higher.One more sad note motley fool's went bankrupt @ the end of 2013.........lol fraz

  • Report this Comment On January 19, 2011, at 8:14 PM, ThongLover854 wrote:

    Let me get this straight...i mean...i have to pause. This article was tough to read since after the first paragraph or so, I had lost complete respect for the writer.

    So...let's see...23 million subs at the beginning of 2014, correct? So...okay...i guess that would mean that the average of about 13 million autos sold every year for the next three years...let's make it 40 million new cars sold...will have a completely different subscribe and churn rate. Since at todays rates you would expect around 25 million WITH SIRI and about 12 SUBS created out of those free trials.

    And i didn't mention USED CARS stepping up the pace or SIRI 2.0. I guess a $12-$24 yearly rate increase will make about 10 million cancel their subs?

    You're way off buddy...put this article in a bottle and open it Jan 2014. Let me know what you find out...

  • Report this Comment On January 19, 2011, at 8:17 PM, ThongLover854 wrote:

    Oh yeah...my estimate Jan 2014...27.5 million subs...30 million by 2015. And don't forget, we will be watching SIRI TV on our IPADS in our AUTOS by that time...and enjoying SIRI 2.0 and so on and so on...

    Pandora...no content...Internet radio...no content...SIRI has all the content...it's pretty simple really. It's all about content...

  • Report this Comment On January 19, 2011, at 8:39 PM, mountain8 wrote:

    Obviously a pump and dump (cynical comment for the idiots that try to convince me TMF is bashing sirius.)

  • Report this Comment On January 20, 2011, at 12:51 AM, MusiCali wrote:

    itaintcool:

    thanks for your comments.

    As far as Pandora,

    I am a musician for the last 25 years and I really do not like Pandora.

    I am not into this idea of having "similar" music randonmly generated from a computer and when I used Pandora I really disliked what they considered to go with the music/artists I like.

    I would rather listen to Sirius sat. radio where the programming is put together by a talented person that decides what "similar" music I am going to want to hear based on the style(s) of music I like and want to hear.

  • Report this Comment On January 20, 2011, at 8:15 AM, splintar wrote:

    Only 3 million more subs in 3 years! Dude here is the simple math and these numbers are written.

    In 80% of vehicles. Vehicles average sold per year per 2014 12 million. 80 % of 14 million.

    For MF sake let's lower this to average for 2011 - 2013 and take a penetration rate of just 65%.

    That amounts to trial subs of about 7 million per year.

    Product is 48% sticky - as written. That amounts to roughly 3.5 MILLION subs / year. Call it 3 million for extra churn.

    You'll see 23 million subs at the end of this year, not in 2014.

    2014 subs will approach 35 million. Telll me where the math is wrong, and I've been very conservative above!

  • Report this Comment On January 20, 2011, at 3:10 PM, doubting wrote:

    calichris,

    Your post is way more plausible than Rick's. Kudos to you. FM is missing depth on siri. This is their universal disease. I hope siri management is reading and not ashamed to pick up some smart ideas.

  • Report this Comment On January 21, 2011, at 10:05 AM, SocalChris wrote:

    doubting:

    Thanks for your support! I've been researching and following (and owning) SIRI for 2 years.

    I'd like to add that my post isn't based on fantasy. I've seen seen some posters imply that SIRI stock reaching $10 or above is just a foolish (excuse the MF pun) dream.

    But every point I make is based on facts.

    I just speculate on how those facts could play out in the future, which of course is subjective. Just another scenario to consider.

    LONG SIRI and good luck to all.

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