Sirius XM Radio: Tomorrow's Monster Stock?

Stocks climbing to 10 times their original price are rare breeds. But they're not impossible to find, especially when you have Fools for friends.

The market's best stocks include companies that have risen dozens of times in value by taking advantage of the market's weaknesses. These aren't penny stocks; they're viable companies with sound business prospects that are achieving phenomenal returns. Finding just one or two of these monstrously successful firms can help you establish a winning portfolio.

Stalking the monster
To find tomorrow's winners, we've enlisted the help of the monster-trackers at Motley Fool CAPS, the 180,000-member-driven investor community where informed opinion is translated into stock ratings of one to five stars. We'll be peering in on the picks of those who have successfully chosen stocks that doubled, tripled, or even quadrupled in price, and this week All-Star member mwink gives us satellite-radio operator Sirius XM Radio (NASDAQ: SIRI  ) as his next monster pick. He made his mark with Apple (NASDAQ: AAPL  ) , which soared 400% after he picked it to outperform the indexes, compared with the S&P 500's 17% increase.

Of course, you shouldn't jump into the breach just because an All-Star stock picker did. Just consider this as a starting point for your own research of extreme buying opportunities.

Debt and equity
With more than 23.9 million subscribers at the end of 2012, the continued growth of Sirius XM remains predicated on the health of the U.S. auto industry, and as seasonally adjusted sales of light duty vehicles remains above the 15 million mark for the third straight month, the satellite radio operator has a good chance of seeing sales expand.

Yet it's tough to ignore the growing level of competition, not least of which is the recent deal between General Motors (NYSE: GM  ) and AT&T (NYSE: T  ) to offer 4G mobile hotspots in most 2015 model-year cars. Sirius has been able to put off the threat posed by Pandora (NYSE: P  ) and Spotify thus far, but this new option seems a lot more insidious.

Online behind the wheel
Sirius is dismissive of the larger meaning behind the agreement, a brave game face despite its being a herald of things to come. AT&T is simply the first carrier to broadly offer fast connectivity to drivers; it won't be long before Verizon (NYSE: VZ  ) and Sprint Nextel (NYSE: S  ) ink similar connected car deals, and GM will only be the first automaker to give car buyers the option of having a true mobile hotspot.

Luxury-car buyers already have limited cellular connections for dashboard apps for their Audis, BMWs, and Teslas (NASDAQ: TSLA  ) , and Ford (NYSE: F  ) has also offers some connectivity with certain models, such as the Ford Focus EV. But it's the breadth of vehicles covered by GM's plan and the willingness of AT&T to open up its bandwidth to more customers that sets it apart.

And even though it lost the GM OnStar contract to its rival, Verizon's acquisition of Hughes Telematics last year for $612 million is really a bid to allow it to offer similar services in the future.

Entertain the thought
So it's a given we're going to see the connected car become ubiquitous; the saving grace for Sirius at the moment is the sketchiness of 4G service. Smartphone users regularly suffer with less than optimal speeds despite carriers that tout them as defining characteristics, and connecting smartphones, tablets, and other devices to their cars to bring streaming video, music, and whatever else into the passenger compartment isn't about to improve the situation. Of course, the larger, unasked question is, with distracted driving already a concern, do we really want everyone to be so connected when they're driving?

But entertainment in the car is a known quantity and has been a threat for years. This is really just a new version of it, but it still suggests that satellite radio may indeed be a transitory technology when it comes to in-car entertainment. Still, there are other concerns to consider as well.

A king's ransom
Costs are going to be rising for Sirius, as the Copyright Royalty Board imposed new, higher royalties based on the satellite-radio operator's gross revenues. Sirius will pay 9% in 2013 -- up from 8% last year -- and it will rise a half percent annually until it hits 11% in 2017. Of course, that's better than what the studios were looking for when they sought a 12% royalty rate this year, increasing 2% annually and topping out at 20%, but it means investors can expect Sirius to not only pay more money each year, but if its business continues to expand, the costs it will incur because of that will grow as well.

Sirius estimates it has a 68% penetration rate in OEM sales and expects that to be nearly 100% over the next five years. Add in the used-car market and service enhancements (i.e., MySXM custom channels), and it appears Sirius' ability to meet its 1.5 million net subscriber adds looks doable, making an otherwise challenging environment somewhat less risky.

Shares of Sirius are up 37% over the past year and are 77% higher from their 52-week low, but at $3 a share, they're trading at almost 24 times estimated earnings and six times sales, suggesting that the company has come a long way already and may not be a bargain anymore.

I've been fairly bullish on Sirius's stock up till now, but let me know in the comments box below whether it's still OK to tune in and turn on, or should we just drop out?

A chance for scary growth
Even though Sirius XM is one of the market's biggest winners since bottoming out three years ago, there's still some healthy upside to be had if things go right for it -- and plenty of room for it to fall if things don't. Read all about Sirius in The Motley Fool's brand-new premium report. To get started, just click here now.

 


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