Is Sirius XM Worth $2.50?

Wall Street continues to draw new lines in the sand when it comes to Sirius XM Radio (Nasdaq: SIRI  ) . Standard & Poor's analyst Tuna Amobi is the latest to revise his price target on the satellite radio giant higher. He is sticking to his buy rating, but bumping his near-term price goal from $2 to $2.50.

This isn't pocket change. Sirius XM has 6.5 billion shares outstanding now that Liberty Capital's (Nasdaq: LCAPA  ) 40% preferred share stake is in the profitable mix. Amobi's arguing that the company is worth $3.25 billion more than he thought before yesterday's conference call.

CEO Mel Karmazin's dangling the likelihood of an upcoming subscription rate increase was enough to send shares off to a fresh two-year high yesterday. Given the largely fixed overhead at Sirius XM, any additional subscription revenue will be like a Twinkie to a dieting worrywart -- it'll go right to the bottom. Sirius XM has enough in tax loss carryforwards to offset years of pretax profits. If Sirius is able to squeeze another $2 a month out of every subscriber, we're talking about nearly $500 million given its current base of 20.6 million accounts.

Testing its pricing elasticity naturally has its risks.

There are two arguments to consider. On the bearish side, there were nearly 6.4 million Sirius XM cancellations last year. A service can't be too cocky when nearly a third of its base deactivates their receivers in any given year.

On the bullish side, last year's defections were more than offset by the gross addition of nearly 7.8 million radio fans. Save for a two-quarter spell during the first half of 2009, Sirius has always found a way to attract more listeners than those leaving. It was also during this span of time that Sirius XM raised its rates for secondary receivers and began charging for Internet streaming, but the net cancellations were likely a recessionary reaction. The automotive industry was also in a funk, and that's certainly not the case now. Leading showroom operator AutoNation (NYSE: AN  ) may have lowered its vehicle sales outlook recently, but not enough to get in the way of the millions of quarterly car buyers who may be wooed by free satellite radio trial offers.

Getting to $2.50 won't be easy, but it's clearly possible if Sirius XM's inevitable rate boost is well received by its subscribers.

Is Sirius XM's market cap of $13 billion at a share price of $2, or more than $16 billion at $2.50, high or low? Share your thoughts in the comment box below.

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Longtime Fool contributor Rick Munarriz is a subscriber to Sirius since 2004. 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 (26) | Recommend This Article (5)

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  • Report this Comment On May 04, 2011, at 12:00 PM, bottomfisherman wrote:

    I agree, being a long term shareholder and not a trader SIRI going to 2.50 would be wonderful but there are obstacles in the way as well as opportunities, there will be pull backs also which are more great buying opportunities. I am positive it can reach 2.50 but will be patient.

  • Report this Comment On May 04, 2011, at 12:16 PM, guessorgalor wrote:

    By the time Malone's thru, it will propably be a 5 dollar stock out a year or so.

  • Report this Comment On May 04, 2011, at 12:26 PM, Brent2223 wrote:

    I think SIRI will see relatively inelastic demand - people are already paying for something that has zero cost alternatives (terrestrial radio, internet radio, etc.). How many people are going to think it's worth $15 a month but not $17? For road warriors, who would be the biggest consumers of SIRI, the cost of SIRI is inconsequential when looking at the overall cost of car ownership. Let Pandora take all the freeloaders.

  • Report this Comment On May 04, 2011, at 12:34 PM, doubting wrote:

    Sirius is woth much more than $2.50.

    Sirius is unique and practically has no peers in radio. Such phenomenon is rare in industry in principle. Although dtv and dish, time warner and comcast are comparable in terms of content aspect and infrastructure ownership, they are fiercely competing with each other DIRECTLY. Just imagine only cable/sat TV company with no direct competition. In the case of Sirius we do not have to imagine anything. Sirius's competition is NOT DIRECT. With some exception of terrestrial radio that owns its infrastructure but has abominable and incomparable to Sirius content, none of other companies like pandora, slacker, etc., owns infrastructure. The only thing they have is music that is one hundredth of Sirius' galore of offers. These companies simply dwarf compared with Sirius, have ZERO infrastructure being at full mercy of providers. Sirius is unrivaled in its content; Sirius is unrivaled in the auto and any other vehicle. None of the audio entertainment businesses can boast such unique combination of content, means of delivery and vast network of hundreds of contracts. All this requires valuation amounting to a huge premium. It is obvious that that Sirius will reward those who put a premium on the company in their "long" investment. For a businessman who understands what "monopoly" aspects are Sirius is a dream come true.

  • Report this Comment On May 04, 2011, at 1:07 PM, siriuslyrick wrote:

    One issue on the periphery here is the comments that high gasoline prices will have an impact on auto sales. In my own opinion, high gasoline prices will actually increase auto sales in the near term, as people look to more fuel efficient vehicles to replace whatever they have. I think this bodes well for both domestic and imported autos, and in turn bodes well for Sirius, at least in the short term surge in sales this may create.

    Am I way off base here (yes, it has happened in the past)?

    Comments?

  • Report this Comment On May 04, 2011, at 1:16 PM, southernbeachguy wrote:

    I think Sirus is worth more than $2.50 per share and I sure think Tuna has more creditability than Wunderlich or Lazard. Both of those comapnies have been Bashing Sirus as it steadily rose higher. Another words they have been consistently WRONG.

    When someone Bashes a rising stock for such a long time it just shows that they have an agenda for doing that or they are dumb. Certainly they have provided information inconsistant with how the PPS has done. Fortunately, I have not listened to their advice.

  • Report this Comment On May 04, 2011, at 1:29 PM, Austin77478 wrote:

    I have always maintained that Sirius’ stock isn’t really for day trader/shorts. Because the US economy is going to rebound (More car sales) the longs would be rewarded, IMHO.

  • Report this Comment On May 04, 2011, at 1:33 PM, DoctorDWE wrote:

    Mel, you want to help the company? Lets get serious (no pun intended) about reducing the share count and buy back shares as soon as possible. Why not pave a plan between now and when the satellites are projected for replacement? Get the high flying salaries under control, wow how about squeezing out some of the fat and compressing company structure so that everyone has work to do each day. Where is the Sirius sales display in my local Wal-Mart anyway? Branding branding branding! Do college students across the country have access to low cost or FREE equipment? College student subscription rates? Who is gonna buy those cars and activate them radios anyway? Who are the future subscribers? Why the churn? I wonder what the cost of buying a loyal customer is for Sirius-XM? Any brainstorming going on there? I like the gross income line on the balance sheet. I can't imagine what a billion is. I would love to be a fly on the wall during company meetings. That P/E looks ..... ouch! I sold siri when the stock was at 60.00 and bought siri-xm back at 3. Mel, if it was good enough for you it was good enough for me. I think with some work you can get it to 15, but you gotta make some people mad before you make them happy. The trick is to get folks on board with the plan! Which we gotta make .... I love my Siri-XM radio!

  • Report this Comment On May 04, 2011, at 2:11 PM, hypnorandy wrote:

    While there were nearly 6.4 million Sirius XM cancellations last year, you fail to note the large percentage of last year's defections were not that at all, but were simply switching to a new/other auto and new SIRI/XM set in the gross addition of nearly 7.8 million radio fans.

    They lost far fewer than what you noted as defections!

    $2.44 by the end of September... long and longer!

  • Report this Comment On May 04, 2011, at 2:35 PM, bpros wrote:

    Is Sirius worth 2.50? A while back the question was is it gonna get d-listed, then it was gonna do a reverse split, then they asked if it was gonna hit 1.50,then they asked if it was gonna hit 2.00.....Really? A year from now they will be asking if it will 20.00....Don't hate, appreciate.....get busy livin or get busy dyin

  • Report this Comment On May 04, 2011, at 2:37 PM, Austin77478 wrote:

    hypnorandy, the author still has to satisfy the bears.

  • Report this Comment On May 04, 2011, at 3:32 PM, palbenny wrote:

    Mel. The time to buy back stock is now. Dont miss this buying opportunity.

  • Report this Comment On May 04, 2011, at 3:40 PM, eiswien wrote:

    just an opinion, but i think they will start making strategic announcments over the next two quarters that will drive this up to 4 or 5 very quickly. share buybacks will be key rignt now and just the announcment of that will drive teh stock.

    when, not if, it hits 5 the institutions will come into the stock en masse and that will drive the share price up quickly above 7 or 8..

    this is a breakout stock and will move over the next year to levels of 7 - 10 per share with ease.

  • Report this Comment On May 04, 2011, at 3:50 PM, ambler40 wrote:

    Rick, This is crazy, before the merger the two combined companies were worth almost 14 billion!!!! Now that the companies are merged and making leaps in profits and you think the value of this company should not be more than the day they merged. In my own opinion we are looking at a company that should be valued around 20 to 23 billion today???

  • Report this Comment On May 04, 2011, at 5:03 PM, multi007 wrote:

    Ive got 1 word for you - BUYBACK!! As a long, there are way too many shares outstanding, enough to make George Economou say "dang"!

    Buy back stock NOW before the effing thing get to $3. Free flow cash is great - why not buyback?!

  • Report this Comment On May 04, 2011, at 5:11 PM, Austin77478 wrote:

    RAF! Where are you? Could you comment here?

  • Report this Comment On May 04, 2011, at 5:15 PM, multi007 wrote:

    BTW - I am a "lifetime" subscriber on 2 of my car radios. I paid $580 per vehicle for this lifetime subscription. . After 37 months, this lifetime sub starts to pay for itself. Ive had it for 12 months - which leaves 25 months to go. As a person who likes to save money, lifetime subs are a great idea. As a consumer, its a no brainer. But...

    .

    1) As an investor, am I counted as a subscriber? even if I provide no ongoing revenue?

    .

    2) The 6.4 mill subs lost that are offset by the new 7.8 mill subs.... are the lost subs that are "won back" through promotions counted towards the new subs as well? Can the lost sub that is "won back" also be counted as a new sub? Technically, wouldnt that be a wash?

    .

    3) Is there any data that indicates "unique new subs" ? It would be scary indeed to think that 6.4 mill subscribers let their service cancel with none coming back. But it would be equally impressive if SIRI could get 7.8 mill unique subscribers. If they are not unique, then net net could be a 1.4 mill sub gain.

  • Report this Comment On May 04, 2011, at 8:02 PM, pryan37bb wrote:

    @siriuslyrick, I'm not sure the spike in gas prices will have much of a notable effect on car sales one way or another. No one who wants to buy a car changes their mind because gas is too expensive; if they need a car, they're gonna buy a car, but like you mentioned, price-sensitive consumers will tend to lean towards more fuel-efficient models. And if high gas prices are sustained, then longer term the sales would be impacted - unless the product line has been tweaked to compensate, because if, say, their truck sales start sucking, their hybrid SUV sales might've benefited. And I think Ford's diverse product line is well equipped to weather higher prices at the pump.

  • Report this Comment On May 04, 2011, at 8:05 PM, pryan37bb wrote:

    Oh wait, this article is about SIRI, not F. At any rate, the gas price spike shouldn't be reflected immediately in reduced car sales, the biggest concern in my view is government subsidies for public transport. Other than that, people are always gonna need cars, and some tunes to listen to on the way.

  • Report this Comment On May 04, 2011, at 8:06 PM, doubting wrote:

    In my view, since Karmazin has an extremely tight control of the Sirius ship, it makes a lot of sense to listen to the Captain. I have been doing this since he got onboard and never regretted following his public “advice”. The guy is about making money and he knows how to make it, including of course for himself in the first place. He spoke about price increase several months ago. It was obvious what he was going to do. What has changed since then? Nothing, except for that we got closer to August 1. The same will happen with shares buyback. He means is. His plan is obvious. He is saying that he would be happy with 3 to 1 leverage. This means he wants to use available cash first to pay off 2013 debt (2011 debt is practically paid off) or part of it and not to bother about 2014 and 2015 but rather refinance those pieces at a better rate and move them in the vicinity of 2020. Sirius may be done with paying off 2013 debt by Q2 or Q3, 2012, will refinance 2014 and 2015 the same year or even earlier and will get down to business buying back shares from mid- to late 2012. Assuming a two buck price increase after July 31, 2011, the company will be loaded with cash as early as late 2012. So, they can probably buy out over a billion and half plus shares in 4-5 years simultaneously reducing liberty's shares accordingly. To me, this is a reasonable scenario without hype or illusions. Ideally, Karmazin would like to see a float at about 2B shares (plus liberty’s stake of 40% or about 1.33B shares). The question is how quickly he can get there. There is a good chance he could accomplish this by 2017. If we assume that Sirius gets to 30M subs by 2017 (1.8M per year x 5 years), their revenue could be at $180 per sub per year x 30M subs = $5.4B, with profit in the range of $2B+ as early as 2016. If we use a 25 multiple, we are talking a $50B company with stock price without premium at about $15. I believe this is quite a conservative scenario, and we may expect much better stock price. Again, I believe that the only thing that can prevent this scenario from unfolding is liberty buyout of Sirius. Then we will be addressing a different play.

  • Report this Comment On May 04, 2011, at 9:06 PM, motleymarty wrote:

    Yo, yak yak yak. Sirius IMHO is the best thing since sliced bread. I only wish I'd purchased a lifetime subscription at the outset instead of a three-year one. Any case, all the chatter about "new car sales" being the driver for SIRI subs is nothing more than idiotic Wall Street analyst chatter. Really, am I the only car-less investor with a Sirius subscription? Can nobody see the writing on the wall? Why debate the churn?

    We're in a new century. Facebook, Twitter, yadda yadda. SIRI long!

  • Report this Comment On May 05, 2011, at 4:17 AM, ItAintCool wrote:

    Hey folks, where's SiriDOOM and Langco1 these days?

    Guess they're still posting their stupidity on the old articles. You know, the ones where SIRI was still less than $1.00

    They're kind of like Rick's boss, Jim Cramer, who hasn't said much about SIRI since his "Siri is a used lottery ticket" quip when the stock was at .60. Yeah Jim, now it's at $2.13, guess that mean the used lottery ticket keeps on paying off.

  • Report this Comment On May 05, 2011, at 8:37 AM, draland wrote:

    Jimbo's a HATER, and he lost viable client's such as myself for disrespecting our passion in the company and calling us a 'cult'....This stock is $4 by years end...............Nuff $aid !!

  • Report this Comment On May 05, 2011, at 9:55 AM, waterinfo wrote:

    Analysts are constantly trying to dissect current SiriusXM Financial data, apply various commonly used stock market metrics, and come up with a “fair” valuation for SIRI stock. However, normal stock analysis does not properly value a company and a business that has the unique attributes of SiriusXM, just as “normal” market analysis did not predict the meteoric rise of NetFlix from $5 to $250 per share, Apple from $5 to $350 or share, or countless other big market winners.

    The following analysis will look at the valuation of SiriusXM in a different way, by projecting ahead about 9 years and working backwards. To do that, let’s look at the total U.S. vehicle population. In 2007, there were 135,000,000 private cars, 99,000,000 2 Axle/4 tire trucks (e.g. Vans, SUVs, Pickups, etc), 7,000,000 small trucks, 2,000,000 large trucks, and 7,000,000 motor cycles, for a total of roughly 250,000,000 registered vehicles in the United States. By 2020, like AM/FM radios, at least 80% of all vehicles will have satellite radio capability.

    The question however, is how many of these satellite radios will be “active”.

    The SiriusXM 2.0 radio design, launching later this year will allow the company to selectively turn on and off various channels and channel groups in the broadcast service. As a minimum, that would allow SiriusXM to provide a free service of only channels that carry commercials to vehicles that have owners/operators who are unwilling to pay the modest subscription fee for access to all of the active channels. This capability materially changes the SirusXM business model, where a “free” service, reaching on the order of 200 Million users, creates a “radio broadcast” goliath, with huge commercial broadcast potential. On the other hand, if 45% of the users are still willing to pay a modest monthly fee for commercial free music and programming, SiriusXM becomes essentially two businesses. One is a direct extension of their current business with 90 Million subscribers (45% of 200 Million). The other business is the world’s largest, multichannel commercial radio broadcast network.

    Even if we pessimistically assume that ARPU in 2020 is roughly the same as it is today ($140 per year) subscription revenue would be about $12.5 billion. Additional revenue from such sources as weather/traffic services, marine weather and navigation services, and satellite based directory services will easily add another $2.5 Billion, so I will use a 2020 subscription revenue base of $15 Billion. (This could easily be $20 Billion or more with modest price increases, raising the ARPU to $200 per year).

    Commercial revenue will easily reach and exceed $5 Billion per year by 2020. Radio spot advertising currently varies from as little as $50 per minute in Alaska to $3000 per minute in New York City. On each commercial SiriusXM channel, there are more than 100,000 minutes of advertising opportunity per year. If people are willing to pay between $50 and $3000 per minute for a spot ad in a single city, what might a spot be worth on a radio channel with a national footprint, and 200,000,000 potential listeners? Even at a modest $500 per minute, SiriusXM has an advertising revenue capacity of $50,000,000 per year per channel. If roughly half of the SiriusXM channels carry commercials (e.g. 100 channels), Sirius has a revenue opportunity of $5 Billion by 2020. (Also, keep in mind that nearly every household in the country is paying between $30 and $150 per month for cable or satellite TV service, and nearly every channel carries commercials. Thus, having some commercials, even on subscription channels is not completely unreasonable.)

    With $15 Billion in subscriptions and $5 Billion in commercials, by 2020, SiriusXM should be generating $20 Billion in revenue.

    For those of you that have read this far, and believe that SiriusXM will not survive because of the Internet, Pandora, or any other “free service”, I will address those issues in a separate note. For the time being, at least keep an open mind that net neutrality, streaming costs, quality, and coverage will severely limit non-satellite based competition to SiriusXM.

    What kind of profit could be generated from a $20 Billion revenue stream? I have estimated that in two different ways. First, I looked at the latest quarterly report from SiriusXM, and calculated the percentage of revenue that each line item of the income statement represented. I then assumed, that as SiriusXm revenue grows, that there is NO economy of scale, and those percentages remain constant every year until 2020. I further assume that interest and depreciation expense remain constant, which implies that all profits are returned to the shareholders in the form of dividends, since debt is not paid down, and I keep the number of shares constant (no share buybacks). Under these assumptions, Net income in 2020 is projected to be $5.8 Billion or $0.97 per share. In a second scenario, I assume just modest changes in economy of scale, with for example, programming and royalties dropping from 25% or revenue today, down to 17% in 2020. General and Administrative dropping from 7.7% today down to 6% by 2020, and customer services dropping from 9.1% today to 5% in 2020. Under this scenario, projected profits in 2020 are $8.9 Billion, or $1.50 per share. There first scenario represents an annual compound earnings growth rate of 39% and the second a growth rate of 46%.

    What might the stock market pay for a company growing profits at more than 39% a year, with a huge, relatively captive customer base? Twelve times earnings, twenty, maybe forty? Even at twenty times earnings, SiriusXM shares in 2020 should be selling for at least $19 per share and maybe as much as $45 per share. Spread evenly (which of course it never would happen that way) means that the shares should increase an average of at least $2 per share, every year between 2011 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. Along the way, SiriusXM will likely use its large free cash flow to buy back shares, further increasing the earnings per share and stock value. Clearly, recent events, coming out of the worst economic period since the depression of the 1930’s is indicative of the strength of the company’s cash flows and management execution.

  • Report this Comment On May 05, 2011, at 12:14 PM, motleymarty wrote:

    As per usual, waterinfo's analysis is spot-on. Glad to see you!

  • Report this Comment On May 07, 2011, at 3:39 PM, MEversusURSUS wrote:

    Since the question originally was asked, is Siri worth 2.50, and it now sits within easy reach of that based on newly reported potential acquisition of Warner Music - I would say that this is easily obtainable. In fact, As a long holder of this company, I fully expect to see 5 before the year is out, based on improved car sales, introduction of new receivers on the market, an improved subscription rate which may cause some alarm but will serve to add profitability in the longer run. Simply put all other contenders are pretenders...no infrastructure and no content. Sirius and Mel have gotten, well, serious. Improvements to bottom line, talent, debt, and FCF all are indicators for buying this share......

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