Is Sirius XM's Next Stop $3?

Analyst price targets are inching higher for Sirius XM Radio (Nasdaq: SIRI  ) .

Barrington Research's James Goss issued a new report on the satellite radio giant yesterday, offering up a $3 price target for 2012.

Yes, it's time to begin thinking of the satellite radio giant approaching the $3 mark for the first time in nearly four years. After closing at or above $2 for five consecutive trading days, a strong quarterly report early next month may finally establish a floor for what has been one of the market's most volatile -- yet ultimately rewarding -- investments since the market bottomed out three years ago.

Goss arrives at a $3 target by using a multiple of 25 times his enterprise value to EBITDA ratio for 2012. It's a steep multiple for a media provider, but Sirius XM's unique position and its ability to control content give it some serious upside with its scalable model.

Content is a con tent
What would happen to DIRECTV (NYSE: DTV  ) if it should ever lose its NFL Sunday Ticket deal? Subscriptions would take a hit, because it's the one thing that makes the leading cable television service distinctive. Every other pay TV provider has to settle for the incomplete Red Zone gridiron coverage. DIRECTV recently renewed the deal at a hefty price tag, because it knew that hungry rivals would jump at the gig.

It's a different world for Sirius XM. The Sirius half of its service has a deal with the NFL, but it's not as if the pro football league can pit a renewal there against another premium radio service. It obviously can't expect XM to outbid Sirius since the two companies merged nearly four years ago. Sirius XM lives on if the NFL refuses its terms, and the subscriber hit probably wouldn't be all that great.

Sirius XM is probably the only premium media provider where content costs actually have declined over the past year. Compare that to cable and satellite television companies that face escalating contracts with networks and broadcasters.

That's $14.49 to you now
Keeping costs in check is just one part of the margin-widening equation. Getting customers to pay more -- for what is actually costing Sirius XM less -- is the real challenge.

Sirius XM revealed several months ago that it would kick in a 12% price hike early this year. Instead of $12.95 a month for the basic satellite radio service, subscribers will pay $14.49 a month. Without a whole lot of fanfare, the Sirius XM website is now showing $14.49 as its price.

Will the higher rate get in the way of the company's accelerating growth? Sirius XM did manage to close out 2011 with a better-than-expected 1.7 million pop in net subscriber growth. How well will Sirius XM fare in getting new users to sign up at the higher price? How effective will it be in getting existing subscribers to buy into the new rate at their next renewal milestone?

Sirius XM was having no problem growing its profitability under the same rates that it has been charging for years. This is a scalable model where high fixed costs and low variable costs make every new subscriber more lucrative than the one before.

Price hikes obviously aren't popular with consumers. Netflix (Nasdaq: NFLX  ) learned that the hard way, seeing 800,000 net stateside customers defect in last year's third quarter after some of them were to be subject to an increase of as much as 60%. Few will argue that a 12% increase is outrageous, especially for a service that has been glued to $12.95 a month since Sirius' inception.

Threats have been vanquished
Naysayers have been saying that satellite radio merely will be a transitory technology, bridging the gap between the limits of terrestrial radio and the open-ended nature of streaming.

Well, what if streaming and satellite radio can peacefully coexist?

This isn't a hypothetical situation.

Ford (NYSE: F  ) revealed earlier this week that it has sold 4 million cars with SYNC, the automaker's voice-controlled dashboard technology that allows smartphone owners to stream Web content or songs on their devices. Sirius XM is still growing.

Pandora (NYSE: P  ) revealed this week that it's adding Acura and Kia to the growing list of partners that make Pandora streaming accessible in cars. It now has more than 125 million registered users, with the average listener streaming 18 hours of music a month. Sirius XM is still growing.

In other words, the competition has arrived, but the market is expanding to the point where every worthy player can be a winner.

The road up to $3 won't be steady or a quick ascent, but the pieces are falling in place for Goss' target price to happen eventually.

Sirius' trophy wife XM was once a recommendation in the Rule Breakers newsletter service. The growth stock service has identified a hot new multi-bagger. You don't need a subscription to check out the free report, but it won't be around forever so check it out now.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story except for Netflix. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

The Motley Fool owns shares of Ford Motor. Motley Fool newsletter services have recommended buying shares of Ford Motor and Netflix. Motley Fool newsletter services have recommended creating a synthetic long position in Ford Motor. 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 (6) | Recommend This Article (14)

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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 12, 2012, at 3:00 PM, kmacattack wrote:

    Great article, Rick. You and I are on the same page here. While Rocco Pendoza has been bashing SIRI for months with a sledge hammer. I've been saying that he was dead wrong, and investors who ignored the naysayers and stuck with SIRI would be rewarded. Rocco stated flatly that Pandora and other streaming Internet radio services would make SIRI obsolete, predicting a year end price in 2011 of below $1.50, and most likely headed much farther down to around $1.00. When I bought in to SIRI a little over 18 mos ago, I'd been watching the stock closely for about 90 days and monitored it's move from around $0.60 up to $1.00, bought in on a pullback to $0.90, Doubled my position at $1.00, and added another 50 percent at $1.10. What I kept watching was the TRENDS which looked like strong tailwinds for SIRI. They still had huge losses on the books after barely surviving bankruptcy, but Mel had managed to stop SIRI from going over the cliff when the stock dropped to $0.05 per share. SIRI was growing subscribers steadiily and was passing the "tipping point" of about 16 million subs where the company covers fixed costs and begins to make a profit. As I've pointed out about 100 times, SIRI is not like a grocery store selling a commodity with a high fixed cost that doesn't decrease with volume. SIRI is, after all, selling AIR. My father in law was an executive with the largest food distributor in the United States and he told me a corny joke about a grocer who started buying chickens by the truckload, and became the largest chicken retailer in the state within a couple of months. The wholesaler sent a sales rep to call on the grocer to find the secret of his success, which they might be able to use nationwide in marketing chickens through their retail chains. When he neared the store, he ran into a traffic jam. People were hauling grocery baskets of chickens to their cars a block away. When the rep walked to the store, he saw a huge sign on the store window advertising WHOLE CHICKENS $0.39 PER pound. He walked into the store and met the owner who was smiling broadly, since customers were lined up 5 deep at every register, waiting to make the cash registers ring. The rep introduced himself, and asked the store owner, how are you going to make any money selling Chickens for $0.39 per pound, when they cost you $0.49 per pound. The grocer replied "Volume, Man. I'm gonna have to buy a bigger truck!"

    The great thing about Sirius/XM that will benefit shareholders is that when SIRI had 16 million subscribers, their "chicken" cost them $0.39 per pound. Now, with 21 million plus subscribers, the "chicken" (content) costs them about $0.10 per pound, and as I've pointed out numerous times, and you mentioned today, SIRI'S DOLLAR PROFIT AND PROFIT MARGIN GOES DOWN with every new subscriber. They have been profitable for several quarters in a row and rapidly paying off debt. SIRI has not only GRADE "A" chicken (content) that they are marketing, it's ORGANICALLY GROWN, not stuffed full of hormones (commercials) and the flavor (content) is so delicious, it's incomparable. I rented a car last month which was equipped with a SIRI radio, drove about 2,500 miles in 10 days, but most of the driving was done in the 4 days going to and from our 1,000 mile destination. The SIrius radio was never turned off, and I rarely changed statiions. SIRI made the trip the most enjoyable driving esperience I've ever had. I'm going to purchase another car in the near future, and it will have a SIRI radio, and I will be a monthly subscriber for a very long time. SIRI has the potential to hit 30 million subs within 2 to 3 years and just made a very smart move in teaming up with Auto Nation and Car Max. They are giving "free" 90 day trial subscriptions to car buyers. Because used car buyers tend to be younger than new car buyers, I think the conversion rates after 90 days will exceed the conversions for new cars, at about 50 percent. I'm 61, and would never pay $100 per month or more to use an I-phone, but a very high percentage of people in the 18 to 35 year old age group are willing to do so. I was on record last week at a $3 price target for SIRI by year end, and hedged by saying that if the economy improves even marginally, that $4 is within reason. If SIRI can manage to "turn on" about 1/4 of the 20 million or so idle radios in used cars, and they can do so by marketing subs through car dealerships which have many of those SIRI equipped cars in inventory already, they could go into "overdrive" and far exceed Mel's always conservative growth projections. I "Siriusly" love this company! The Sirius elevator is GOING UP!

  • Report this Comment On January 12, 2012, at 3:02 PM, doubting wrote:

    Wow Rick! Great analysis with several great point from competition to naysayers to content to relative independance to high fixed and low variable costs. I have never seen such insight from you w/r to siri in all these years.

    I believe that 2012 is the year that will mark the swing siri's way. I will not be surprised if the stock hits $4 this year. There is so much built in momentum and the potential to explode is already there.

  • Report this Comment On January 12, 2012, at 3:20 PM, kmacattack wrote:

    I goofed when I was using the "Chicken" analogy. SIRI's dollar profit and profit margin goes UP, NOT DOWN, with added subscribers. The profit margins in the media business can be astronomical, and SIRI investors will be rewarded for their patience. I would not sell covered calls on SIRI, unless you want to lose your stock. Barring a broad market crash which is less likely every day, I don's see SIRI pulling back to any degree. $2.00 may be the bottom floor, and the upside potential could be great. I think $8 within 3 years is realistic as more and more investors start examining the financials, and the "miracle" turnaround SIRI has managed to accomplish. Even if Mel retires in a few years, this company could almost run itself on auto pilot at that point. All they have to do is keep doing what they are doing, delivering the absolute best content via satellite, which makes it very possible for SIRI to expand to the world market. No other company could afford to spend the money to build a "from the ground up" SIRI, and the Internet is limited by a shortage of bandwidth. Unlimited data options are going to disappear before long, which will put the brakes on would be SIRI competitors. Even if bandwidth were not an issue, no one can duplicate SIRI's content and sheer genius programming.

  • Report this Comment On January 12, 2012, at 3:42 PM, susynleblanc wrote:

    I first purchased Sirius the day I heard Howard Stern was going satellite about 6 years ago. It was at 3.00 a share and I sold at 8.50. When the stock bottomed out, I started repurchasing shares at 0.60 and have been buying ever since. If the stock gets to 10.00 I can retire! It is still not too late to get in while the price is low and get great returns!

  • Report this Comment On January 12, 2012, at 3:58 PM, doubting wrote:

    Susynleblanc,

    I will be very happy for you because you DESERVE it. It appears I am in a similar situation but fortunately I do not need to wait till ten.

  • Report this Comment On January 13, 2012, at 9:40 AM, dwg1120477 wrote:

    If it goes to $10.00, my KIDS can retire !!!

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