Sirius XM (NASDAQ: SIRI ) continues to add subscribers and grow revenue and earnings. The company still trades at well below its 52-week high. Sirius has a large subscriber base that provides recurring and predictable cash flows.
Sirius XM offers more than 140 different channels which cater to a wide variety of customers, and has long-held relationships with all of the major automakers which substantially aid it in acquiring new customers. Going forward, Sirius XM will continue to drive strong revenue and free cash flow.
Fundamentally sound business
Sirius XM had 18.8 million subscribers back in 2009, and has continued to grow its subscriber base in the high single digits every year. It now has a total user base of 25.8 million. The company is well on track to surpass $4 billion in revenue in 2014 and management laid out adjusted EBITDA and free cash flow expectations for 2014 of $1.38 billion and $1.1 billion, respectively. Sirius XM has a very strong business and management's expectations for 2014 clearly suggest that the company is moving in the right direction.
Estimates place auto sales for 2014 at 16.1 million on the back of 15.5 million in 2013. The Sirius XM service is expected to be installed in 70% of all new cars due to the company's strong relationships with automakers, which the company cultivates by sharing a small portion of revenue with them. In other words, auto manufacturers and dealers do a large portion of the heavy lifting for Sirius XM's new customer pipeline. Thus, the number of cars with Sirius XM receivers will almost double from 62 million currently to 120 million by 2019.
The company made its way into the connected-vehicles infotainment business with its acquisition of the telematics services business of Agero. That segment should grow in the next few years. Sirius's connected vehicles business should do about $100 million in revenue in 2014, and that should double in the next three years or so. It is already a leading provider of next-generation connected vehicle services business.
Exclusive content is key
Sirius XM offers a lot of content and some of the commodity music content overlaps with other major players that include Pandora (NYSE: P ) , Apple (NASDAQ: AAPL ) , Spotify, etc. Sirius XM has 25.8 million paying subscribers and most of them have access to large swaths of non-music content through its service that includes talk shows, news, sports, etc. This is a key and major differentiator for Sirius XM's offering.
The major competitors of Sirius XM all use ad-supported business models, and this includes Apple's iTunes Radio which has notched up more than 20 million listeners and should soon attract more because Apple just acquired Beats and gained its music subscription business. However, Apple remains far behind Pandora Media, which seems to be holding up quite well in terms of usage.
Pandora has more than 76 million monthly active listeners, which includes 3.5 million paying subs. However, Pandora's large music royalty payments are a major headwind for the Internet music streaming platform. As a result, Pandora is still running at an operating loss although it has been in business for many years.
Sirius XM remains well ahead of the pack with its large variety of content, much of which is exclusively available on Sirius XM. Major talk-show hosts like Howard Stern and a large roster of exclusive celebrity guests on numerous channels give Sirius XM a robust and durable competitive advantage.
The bottom line
The company has a stable roster of customers who pay a small subscription fee every month and as a result it has very predictable cash flows. In addition, Sirius XM has more than $6 billion in net operating losses, or NOLs, some of which it will utilize in the near future to shield net income. The company will utilize its free cash flow growth to reduce its outstanding share count and that will drive EPS growth in the future.