Sirius XM: A Long-Term Investment

Shares of satellite radio giant Sirius XM  (NASDAQ: SIRI  )  have seen a boost after the company's proposed takeover by controlling shareholder Liberty Media  (NASDAQ: LMCA  ) is no longer applicable. Sirius XM has more than 25.6 million subscribers and it can grow its customer count effectively because it is increasing its addressable market.

Sirius has managed to increase its pre-tax earnings for four consecutive years, driven by healthy growth in subscriber count. Going forward, Sirius XM will do very well whether it goes private or remains a publicly traded company. 

Sirius XM's addressable market rises
The world's largest satellite radio broadcaster has been differentiating itself from the competition by involving more famous personalities with its talk shows and bringing leading musicians to its on-air concerts. The company's value proposition differs vastly from free terrestrial radio. Every major car company in the U.S. offers Sirius XM, and the broadcaster has also ramped up its presence on the Internet. Sirius XM also holds a minority stake in Sirius XM Canada, which has more than 2 million subscribers, and it collects valuable royalty fees from this Canadian holding.

As the penetration of Sirius XM grows, the company is looking to target less-affluent consumers and the used car market as ways to grow its addressable market. The company has struck a good balance between growing its average revenue per user, or ARPU, and adding newer subscribers.

Sirius XM added 2 million subscribers in 2012 and it added another 1.67 million in 2013. Management expects Sirius to add another 1.25 million to its tally. Sirius XM spends a substantial amount of money to advertise and market to customers and auto-makers to get them to sign up for its unpaid trial. 

Did someone say upgrade?
Macquarie recently upgraded Sirius's price target to $4 a share, citing the company's ability to grow its business nicely over the next three years. And Bank of America upgraded the shares of Sirius XM to $5 a share citing that the company can grow, and that the company will buying back a lot of shares with its free cash flow, after the Liberty Media bid media was off the table. 

Liberty Media's CEO stated on the earnings call that there are 250 million cars on the road and that the company doesn't need all of them to grow and maintain Sirius's business. Considering that Sirius's subscriber count is under 26 million, there is a lot of room for growth.

However, Sirius will face higher music royalty rates in the next few years. In 2013, Sirius paid 9% royalty rates for music, and this is expected to increase by 50 basis points every year until 2017.  However, the company is diving into newer product categories to grow its business to reduce its dependence on subscription revenues.

Newer product lines
Sirius has many relationships with various automakers, and the company can leverage these OEM relationships to grow its connected vehicle business which it acquired from Agero. There are 60 million cars with Sirius's satellite receivers installed, and the company is working to grow this figure to north of 110 million cars in the next few years.

Most of these cars do not have Sirius XM subscriptions, but the company can provide these consumers with security and safety solutions by working with auto manufacturers and figure out other ways to monetize these cars via their Sirius receivers. The management of Sirius hopes that the connected-vehicles business will generate revenue of close to $100 million in 2014 and that it will keep growing at a stellar pace in the next several years. 

The bottom line
Sirius will be able to do well over the long-run. The company is trying to increase its penetration in the secondary car market and trying to offer more compelling content to its subscribers. Sirius as a stand-alone company will still be controlled by Liberty, and Sirius will be resuming its repurchases.

The company's free cash flow grew 31% in 2013 to $927 million and it still has $2.2 billion in share repurchase authorization. Sirius will be able to grow its subscriber base as the company is broadening its addressable market and developing newer revenue streams, and thus Sirius shares have big long-run upside.

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