Buy, Sell, or Hold Sirius XM

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Sirius XM Radio (Nasdaq: SIRI  ) was singing sweet music early in 2011, but lately seems to be picking up mostly static. The stock continued its unbelievable turnaround to start off 2011 before peaking at $2.44 in May. Because of promising subscriber numbers it's now moved up around $2 after trading much lower for the past six months. Increased competition has helped cool off the stock, but Sirius has finally put up consistent profits and its balance sheet has stabilized. With 2012 shaping up to be an exciting year in the radio industry, let's take a look at whether Sirius is still a smart investment today.

Improving financials: Sirius has gone from being a speculative bet to being a reasonably solid company, posting three straight profitable quarters, and Moody's and S&P have upgraded their credit ratings in the past year. Though last quarter's revenue was only up 6.3%, the years of losses have also given Sirius a boatload of tax loss carry-forwards.

New technology: Sirius 2.0 finally rolled out this holiday season and will offer listeners 30 new channels and some access to on-demand programming. Fellow Fool Rick Munarriz sees a big opportunity with the new 2.0 Lynx receiver, saying it may be able to stream movies and link to smartphones to provide users larger screens.

The improving financial numbers are certainly a welcome sign, but the high price of the Lynx, $249, has me questioning how many listeners are going to make the upgrade.

Broadcast media is a fast-changing industry. While satellite radio might have seemed cutting edge in the '90s, Internet radio may be leapfrogging it today. Pandora's (NYSE: P  ) IPO further bolstered its capabilities, and the free Internet radio service boasts more than 90 million subscribers, many more than Sirius' 20 million paid subscribers. Spotify's entrance into the U.S. market, Clear Channel's rollout of iHeartRadio and CBS' also raise the ante in the battle for listeners.

Talent drain: Howard Stern is Sirius' biggest draw. Stern made waves when he first signed with Sirius in 2004, but the 57-year-old shock jock has said he's leaving after his current contract expires in 2015. That may be a ways away, but Stern's also cut his workload down to four days a week and has threatened to make it three. The satellite radio provider lost another big name when Rosie O'Donnell's Rosie Radio ended its run earlier last year.

Sirius seems to be unable to draw younger stars or create its own homegrown talent, relying instead on such big names from the outside broadcast world as Dr. Laura Schlessinger, Oprah Winfrey, and Opie & Anthony, and I'm afraid this is hurting its ability to draw a younger demographic and offer exclusive and unique programming.

With the encroachment of Internet radio and free media such as podcasts, I fear that Sirius is losing its content advantage. Its music offerings are no longer a selling point in and of themselves, which means the company will need to shift its focus from music to compelling listening in its talk shows, news, and sports. Developing talented on-air voices will be key to adding subscribers in the years to come.

Price increase:
Subscriptions start at $12.99 right now, but Sirius raised the rates for most of its listeners starting Jan. 1 by $1 to $1.54. The price hike could be a make-or-break moment for the broadcaster. Netflix torched shareholders in 2011 when it raised subscription prices from $10 to $16. Sirius is only raising rates by about 10%, though, and if it can hold on to its subscriber base, most of that money should go to the bottom line.

Auto sales: Sirius' fortunes are attached at the hip to the auto industry's. Most radio listening takes place inside a vehicle, and every new car purchased gives the satellite radio provider a potential sale. New car sales are still well below their prerecession levels, and some analysts believe consumers can only avoid those purchases for so long. A General Motors executive said he thought industry sales in the U.S. would grow slowly this year, while projected a 6.3 % increase in vehicles sold. Honda Motor said it expects U.S. sales to increase by 23% this year, and Toyota is eyeing an 8% increase as both automakers recover from problems caused by the tsunami earlier last year.

These two factors will be the most determinative of Sirius' success in the near future. If subscribers absorb the rate increase and car sales pick up, then revenues for the entertainment provider should rise along with them.

My call
Hold. I'm waiting to see how the rate increase affects subscription figures. If subscribers don't flinch, then 2012 should be a good year for the media company. Longer term, I'm concerned about the growing threat from Internet radio, and I'd like to see Sirius make some bolder moves to create new talent and reach out through alternative channels like a partnership with a car-sharing service like Zipcar, for example.

Zipcar aims for 40% usage for its fleet, meaning its cars should be occupied for about 10 hours a day, much more time than an individually owned car. Zipcar and Sirius XM could partner up to charge users a small fee for satellite radio in their rental car, and in turn a younger demographic could sample the premium service. Though they aren't car owners now, they will likely be someday, and in the meantime this could help Sirius add Internet and smartphone subscribers.

Sirius XM may have an opportunity with mobile technology, but there's one company our experts here are convinced will dominate the mobile revolution. In fact, they're calling it the leader of "The Next Trillion Dollar Revolution" and they've just released their free report on this hot stock. You can read it by clicking right here. The report is free and available now, but it won't be around forever.

Fool contributor Jeremy Bowman owns shares of Sirius XM, but no other companies mentioned in this article. The Motley Fool owns shares of Zipcar. Motley Fool newsletter services have recommended buying shares of Zipcar and General Motors. 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. The Motley Fool has a disclosure policy.

Read/Post Comments (7) | Recommend This Article (11)

Comments from our Foolish Readers

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  • Report this Comment On January 09, 2012, at 12:09 PM, Austin77478 wrote:

    “The improving financial numbers are certainly a welcome sign, but the high price of the Lynx, $249, has me questioning how many listeners are going to make the upgrade.” Jeremy! Please get your facts straight. Lynx is selling out like hotcakes. Sirius is on the move up, no matter any attempts to suppress it.

  • Report this Comment On January 09, 2012, at 12:10 PM, sirifire wrote:

    Well balanced thoughts for a post that is not going into much detail.

    I am also curious about the impact of the price increase although odds seem to be in favor of siri due to a minimal increase and slowly but still improving economy.

    I believe that the stock is a buy. However, to feel very strong we need to wait just for 2012 Q1 sub growth. If siri hits it out of the park again (between 400K and 500K new net subs in Q1) like it did in 2011 Q4 with about 540K new subs just reported preliminarily, the trend may be too convincing to deny this company a great future both short- and long-term.

    Of great interest of course are the 2011 results. Again, siri is expected to beat projected EBIDTA by at least $50M reaching $765M for the year. I also expect the company to update its 2012 guidance with EBIDTA over $900M and fcf reaching $750M. If these predictions turn to be true, there is a great chance the stock would hit $3 this year.

  • Report this Comment On January 09, 2012, at 12:35 PM, waterinfo wrote:

    "Free Internet Radio Service" like Pandora and its clones is not Free and it is not a Radio Service. It is a mobile jukebox, layered with commericals and inconveniences, not to mention the need for a monthly mobile internet service costing $50 per month or more which is likely to have a usage charge that could cost internet audio listeners as much as a dollar per hour or more.

    A Radio Service requires not only a sampling of musical compositions, but requires access to information, sports, news, comedy, concerts and entertainment of all sorts, the strength of SiriusXM with its huge array of content.

    More than 75% of the US households pay more than $100 per month for cable or satellite TV, while over-the-air broadcast is "free". The same desires that motivate TV viewers to pay this monthly fee for CONTENT is the same as that which will continue to grow the demand for SiriusXM's content, for only $15 per month, not more than $100.

  • Report this Comment On January 09, 2012, at 3:17 PM, kmacattack wrote:

    I've made a lot of money with SIRI over the past 18 mos, up 100 percent now, plus made money selling puts when the stock pulled back. SIRI is in far better financial shape now than when I bought in at $1.01 average. The economy is growing, despite the efforts of certain politicians to stop the progress for political purposes. Car Sales are improving .I like that because I also own Ford, and really cleaned up by buying it in December of 2008. SIRI is partnering with Auto Nation, Car Max and other national used car dealership chains to get the 20 million idle SIRI receivers turned on by giving away 90 day subscriptions, which I believe will convert at a higher rate than new car subs to paid, because the used car buyers are more likely to be younger, and who view spending $14 per month on the Rolls Royce of audio entertainment. They are spending upwards of $100 per month on their I phones, and I bleieve SIRI has an add on package for I phones and home computers. Profit margins are huge, they are selling AIR after all, they can add millions of more subs at very low cost per subscriber, so with every single new sub, SIRI's dollar profit and profit margin increases. They are adding new channels to cater to the growing Latino market, and those channels can be sold in Mexico and Latin America when SIRI wants to actively pursue those markets. The asian market could be huge with their deal with Indias automaker TATA, which also owns Jaguar and Land Rover, and they have the SIRI radios. already. Jag and Land Rover, which were never profitable for Ford, are one of TATA's shining stars and they are doing well selling those lines in neighboring China to the increasingly affluent Chinese market. My prediction for SIRI's year end price is at least $3.00 if the economy continues to grow only at the current rate, and could top $4.00 if the economy picks up only slightly from where it is now.. I'm SIRIusly in love with this company.

  • Report this Comment On January 09, 2012, at 8:47 PM, vesprito1 wrote:

    FOOLS CALL: hold.

    I have not been on this fools sight for over 8 months and nothing has changed, they are steel fools and SIRI keep going up.

  • Report this Comment On January 10, 2012, at 4:22 AM, frankcy wrote:

    Last year was the worst year for investors and the whole economy, now I am afraid to trade, so I will see first , how january is going to be.

  • Report this Comment On January 11, 2012, at 9:36 AM, baldheadeddork wrote:

    ""Free Internet Radio Service" like Pandora and its clones is not Free and it is not a Radio Service. It is a mobile jukebox, layered with commericals and inconveniences, not to mention the need for a monthly mobile internet service costing $50 per month or more which is likely to have a usage charge that could cost internet audio listeners as much as a dollar per hour or more."

    That "dollar an hour" has been knocked down so many times you should be embarrassed to keep repeating it.

    But while you're talking about the high cost of free, let's look at what you pay for SIRI 2.0. The receiver with a car dock kit is $320. Installation is going to be another $100 or more. Annual subscription cost is $200-250, and you'll need to add tethering to your phone or buy a mobile wifi plan to get smart control. You're out several hundred dollars to get what streaming radio offers for free, and good luck taking SIRI 2.0 with you to the gym.

    This added cost and complexity was the deal killer for satellite broadband and I don't see how it makes Sirius stronger.

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