Sirius XM: Strong Future Ahead

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.


Read/Post Comments (6) | Recommend This Article (10)

Comments from our Foolish Readers

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  • Report this Comment On June 03, 2014, at 1:23 PM, tjtoretire wrote:

    Thank you Faruk for setting the record straight on Sirius. There are so many negative writings about Sirius that only serve to discourage investors on a very viable product. I particularly like the following facts mentioned in your article:

    1. The number of cars with Sirius XM receivers will almost double from 62 million currently to 120 million by 2019.

    2. Sirius's connected vehicles business should do about $100 million in revenue in 2014

    3. 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.

    4. The major competitors of Sirius XM all use ad-supported business models

    Just as important, Sirius is available everywhere I travel. It is never out of range with satellite coverage. No others provide this service.

    Please keep up the good work.

  • Report this Comment On June 03, 2014, at 3:35 PM, ishfaque wrote:

    tjtoretire-- Thank you very much.

  • Report this Comment On June 04, 2014, at 10:33 AM, dannysboy wrote:

    Very good!

    I would add the great value of simplicity. You don't have to know anything about computer science to use the product-----no user name, no pass words, no subscriber participation required in upgrades.

    In 1934, you turned on your radio and dialed up the station you wanted.

    In 2014, you turn on your sat. radio and punch, or dial up, the station you want (150 choices) and take it with you to any of the 4 corners of the North American continent.

  • Report this Comment On June 04, 2014, at 5:56 PM, Austin77478 wrote:

    CN & Cameron WSP are not going to be happy with this article.

  • Report this Comment On June 05, 2014, at 9:11 AM, sirifair6 wrote:

    IF,

    You are one of few consistent siri writers who can see the forest for the trees. I also agree with all the commenters here in particular with not a minor aspect about siri's convenience only comparable to terrestrial radio.

    For years I have been saying that the major problem that siri will be facing is its inordinate share count. The past year and a half they were able to address it. We should understand that it may take the company a decade to reduce the share count to a reasonable number around $2B shares. Ten years seems as a long time but let us not forget that the company has a tremendous potential to triple its revenue and fcf in this time frame.

    I am confident that in the paid radio market sirius xm has positioned itself extremely firmly with its own 100% independent infrastructure, a lot of proprietary content and having created vested interest of auto makers in siri's success. As the economy continues improving consistently discretionary spending will be on the rise that will bode well for siri. The company has at least a decade for stable growth both in the paid radio market with growing OEM sales and rising used car market (in terms of sat enabled radios) as well is in the auto connectivity. The latter may generate billions in this time frame.

  • Report this Comment On June 06, 2014, at 1:05 PM, dannysboy wrote:

    sirifair,

    I own and operate a very small firm servicing the new car dealer segment.

    One of the great drivers of car sales is the aging of the fleet of vehicles on the road.

    Prior to the '08 panic, the fleet of cars was around 7.5 years old and went up to 11 years!

    I haven't checked recently but not that long ago I heard it was still close to 11.

    With that kind of number, demand is going to stay pretty strong, even in a weak economy. Cars and trucks simply must be replaced.

    The Automotive News is a good source for tracking this number, particularly at year end.

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