Is It Time to Take This Radio Stock Siriusly?

As one of Sirius XM Radio's (Nasdaq: SIRI  ) more than 21 million subscribers, I want to believe in the stock. The satellite-radio provider managed to avoid bankruptcy three years ago, and since that time it has recovered from its February 2009 low of $0.10 a share to where it currently trades at around $2.26. The question is whether the radio king can keep the growth going. To be clear, there's a major difference between a company and its stock. Not all popular companies make good investments, and that, dear Fools, could be the case with Sirius XM.  

Shares of Sirius look expensive, with a P/E ratio north of 32. Ultimately, the company's success rides on its ability to gain new subscribers and retain old ones. Sirius closed 2011 with record subscriber growth -- welcoming 1.7 million new net subscribers for the year. Its recent deal with Toyota (NYSE: TM  ) is also encouraging, because it should help accelerate subscriber growth. Under the agreement, new drivers of used Toyota vehicles will receive three months of free Sirius XM satellite radio.

Is it enough?
There is no shortage of risks tied to the fate of Sirius XM. Sirius relies on auto partnerships such as the Toyota contract to funnel in new paying customers. As my Foolish colleague Rick Munarriz points out, about half of its trial subscriptions translate into actual customers. This could work against Sirius, considering another slowdown in car sales would reverse its current subscriber growth.

True, it is the only reliable satellite-radio service available. But that doesn't mean it plays in a competition-free zone. Internet radio players such as Pandora Media (NYSE: P  ) and Spotify use freebie platforms to lure listeners away from Sirius. With 68% of the Internet radio market cornered, Pandora doesn't have a problem gaining new listeners.

Despite claiming more than 125 million registered users, Pandora struggles to turn a profit. Ad revenue is the company's bread and butter, which means that unlike for Sirius, adding new users doesn't mean more sales for Pandora. Sirius is growing its online offerings by adding content such as full NASCAR coverage for subscribers who have Sirius XM Internet radio access -- although Internet streaming will cost you an extra $3 per month.   

To buy or not to buy
From an investment standpoint, a company that charges customers to use its services (Sirius) is a much stronger business than one that offers its services for free (Pandora). Therefore, I don't see Pandora as a direct threat (yet) to Sirius. However, Sirius has a lot left to prove before I throw my cash behind it.  

Investors who plan on buying Sirius solely on the share price should carefully consider the risks before committing.

Don't get me wrong: I love my satellite radio. While I'll gladly pay $14.49 each month for the service, I'm not yet ready to subscribe to the stock. Both Sirius and Pandora are volatile investments. If you're looking for a more investor-friendly opportunity, you'll find it in this free report from The Motley Fool titled "3 Stocks That Will Help You Retire Rich". Get instant access to three stocks that will help you build long-term wealth -- it's free.

Fool contributor Tamara Rutter owns no shares of any companies mentioned in this column. Follow her on Twitter, where she uses the handle @TamaraRutter, for more Foolish insights and investing tips. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (6) | Recommend This Article (4)

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 March 27, 2012, at 7:35 AM, dimrod wrote:

    Pandora does charge it subscribers for commercial free content.

  • Report this Comment On March 27, 2012, at 7:56 AM, doubting wrote:

    Tamara,

    Let us look at the company and its business really "siriusly".

    Let us deal with the facts rather than very superficial analysis. And the facts are the following for 2011.

    1. 21.9M subscribers with 18M self pay.

    2. $3.01B revenue

    3. $416M fcf

    4. $731M adj. EBIDTA

    5. about $780M in the bank

    2012 guidance (the combined company Sirius XM has beaten its annual guidance routinely in its 3.5 years of existence)

    1. 23.2 M subs (1.3M new subs in 2012 is underestimated at least by 20%) 19M+ self pay

    2. $3.3B revenue

    3. $700M+ fcf

    4. $875M adj. EBIDTA

    5. About $1.5B in the bank (or $1.2B if Sirius pays off 2015 $300M debt maturity)

    2012 guidance was projected on new auto sales at about 13.7M in 2012. First quarter 2012 shapes up at over 14.5M.

    FYI, Sirius XM is installed by ALL auto manufactures selling cars in this country and with over 4000 dealerships (0of existing 20K) selling used cars where recent Toyota pre-owned and used certified cars deal is a small portion.

    One has to be a REAL fool to overlook phenomenal cash growth trend. With the recent price increase of $1.49; continued economy improvement and auto growth to 17M annual sales as early as 2015; low capex in the next 5 years with all birds in the sky for the next 12 to 15 years and established ground infrastructure; continued penetration into the used car market becoming a significant contributor to sub growth with close to zero SAC (sub acquisition costs); and sat radio 2.0 technology allowing IP on-demand and personalization as early as 2012 Sirius XM as a true monopoly will kill radio market.

    And last but not least. Comparing Sirius with Pandora is like comparing Exxon with a mom and pop oil producer. FYI, siri's profit in 2011 was over 200 times Pandora’s and in 2012 will be 1000 times that of Pandora. Please do not compare a radio giant with a press release company (ies).

  • Report this Comment On March 27, 2012, at 8:30 AM, Ozwhat wrote:

    Wow doubting, thanks for some facts on the topic.

    This article makes me laugh as it basically says Sirius is the best product out there but dont invest in it because there are free service out there not making a profit?

  • Report this Comment On March 27, 2012, at 8:47 AM, southernbeachguy wrote:

    "Don't get me wrong: I love my satellite radio. While I'll gladly pay $14.49 each month for the service, I'm not yet ready to subscribe to the stock." ...... Glad I didn't listen to all the writers that have been saying that for the past 3 years or I would be down the 497% that I am up on Sirus.I can't imagine what else Sirus can do to convice you that they are a Great company, that has a great product, great business plan and the best programing. Are you waiting till year to start tell people to invest when the PPS is $4.50 and they missed out on doubling their gain again.

  • Report this Comment On March 27, 2012, at 9:26 AM, doubting wrote:

    It would be great if writers could present real data with projections based on facts rather that doomsday scenarios. You could always take a middle growing position. Why in the world would I assume today that Sirius XM is not going to grow when it did grow consistently in the past 3.5 years of the worst recession in 70 years, with only one quarter being an exception? Look at 2010 - 1.4M new customers; 2011 -1.7M new customers. Is this growth or an illusion?

    Yes, there may be an impact from the recent first ever in ten years price increase of $1.54 cents per month. But look at others. All cell phone, sat and cable TV companies are raising prices routinely without any shame or reason by much more… without improving their programming quality a tad. We are paying now close to $100 monthly for each of their services. How does this compare with $20 monthly fee for the premium package of over 130 channels with a lot of unique programming and no commercials on almost seventy music channels with those super chargers?

    Anyone with a reasonable ability for analysis can conclude right now that the company has only one direction - more profitability at amazing margins. As early as in 2012, siri’s fcf is going to be 80% of its EBIDTA. Name me another company in its broad sector with such fcf!!!

    Writers should stop bamboozling their readers and make an honest and sensible analysis with sensible projections. For Sirius XM, I repeat, profit margins in the next three years will get close to net 40%. Those who went to school and can count can see this without any experts. We are talking $700M profit in 2012, $1.1B in 2013, $1.4B in 2014 and over $1.7B in 2015 CONSERVATIVELY!!!

  • Report this Comment On March 27, 2012, at 9:30 AM, doubting wrote:

    It would be great if writers could present real data with projections based on facts rather that doomsday scenarios. You could always take a middle growing position. Why in the world would I assume today that Sirius XM is not going to grow when it did grow consistently in the past 3.5 years of the worst recession in 70 years, with only one quarter being an exception? Look at 2010 - 1.4M new customers; 2011 -1.7M new customers. Is this growth or an illusion?

    Yes, there may be an impact from the recent first ever in ten years price increase of $1.54 cents per month. But look at others. All cell phone, sat and cable TV companies are raising prices routinely without any shame or reason by much more… without improving their programming quality a tad. We are paying now close to $100 monthly for each of their services. How does this compare with $20 monthly fee for the premium package of over 130 channels with a lot of unique programming and no commercials on almost seventy music channels with those super chargers?

    Anyone with a reasonable ability for analysis can conclude right now that the company has only one direction - more profitability at amazing margins. As early as in 2012, siri’s fcf is going to be 80% of its EBIDTA. Name me another company in its broad sector with such fcf!!!

    Writers should stop bamboozling their readers and make an honest and sensible analysis with sensible projections. For Sirius XM, I repeat, profit margins in the next three years will get close to net 40%. Those who went to school and can count can see this without any experts. We are talking $700M profit in 2012, $1.1B in 2013, $1.4B in 2014 and over $1.7B in 2015 CONSERVATIVELY!!!

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