Sirius XM(SIRI -1.16%) is a fundamentally strong company with stellar subscriber and free cash flow growth. However, the company has recently seen a big increase in its short interest. Whiel I am personally bullish on Sirius XM, I decided to put myself in the shoes of the short sellers and explore the bearish thesis for Sirius XM. The three major headwinds surrounding Sirius XM are:
Rising competition
Sirius XM's competition in the music streaming space is constantly on the rise. Increasingly, consumers have a wide array of options available from companies with large consumer followings -- Pandora(P), Apple, iHeart Radio, Spotify, and recently Amazon. In addition, AM/FM Radio has more than 200 million weekly users, so the competition is definitely in place.
Internet-enabled radio is growing rapidly and Pandora is leading the way. At the end of May 2014, Pandora had 77 million monthly active users, and the company even stated that it is pushing for more penetration in cars where it has 5 million active users already.
However, Pandora competes more directly against Internet radio players and terrestrial radio because of its extensive focus on music. Sirius XM's service contains more than 140 million channels with substantial unique content. Sirius XM's biggest competitive advantage is clearly the exclusive content that it provides to its users.
Consumer adoption of pay radio
Sirius XM already has more than 25.8 million subscribers but it is unclear how many customers the company can get over the long run. U.S.-based customers are accustomed to terrestrial radio and it's reasonably hard to figure out how many consumers will adopt pay radio over the long run.
There are roughly 260 million autos in the U.S. and Sirius XM's future subscriber growth is contingent upon the company's ability to grow its current penetration levels. Many consumers prefer free ad-supported radio and other Internet-based services, so there is a question mark regarding the company's ability to grow its subscriber growth significantly from current levels. However, the company needs only a small fraction of the total U.S. auto population to grow its business significantly from its current level of under 26 million subs.
Dependence on the auto market
Sirius XM's business is heavily correlated with new auto sales and, therefore, the the broader macro-economic environment. New auto sales stood at 10.4 million in 2009, with 16.1 million expected in 2014. However, if the lumpy auto market declines because of economic headwinds, this might negatively affect Sirius XM's subscriber additions.
However, the satellite radio company has continued to grow its penetration rate for new autos. Back in 2009, Sirius XM was enabled in 56% of all new autos and in the last quarter the penetration rate stood at 70%. Owing to its very strong relationships with almost all OEMs, the company has managed to install its satellite radios in many vehicles and hand out free trials to consumers, irrespective of the number of new car sales in the U.S.
The bottom line
Sirius XM has a fantastic business and should continue to perform well despite the concerns bears have. The company has strong subscriber growth, a focus on optimizing free cash flow, and shrinking its outstanding share count through buybacks. The company has a solid moat due to its long-standing ties to all major OEMs and its exclusive content, and both of those things are very hard to replicate for existing and future competitors. Sirius XM shorts might be prompted to cover their positions in the future.
