Sirius XM Holdings (SIRI +0.00%) was one of the market's biggest winners over the past decade; since bottoming out in early 2009, it has been a wealth-altering 125-bagger. But how should investors assess the satellite radio giant's prospects for the next 10 years?
Visualizing where Sirius XM will be come 2029 is no easy task. It's not just a matter of forecasting how people will be consuming audio entertainment in 10 years. There are also the factors such as auto ownership trends to consider, and what markets Sirius XM might have enters beyond its current stronghold of satellite radio. How many subscribers will it have, and will average revenue per user be higher, lower, or about the same?
One prediction we can be fairly certain of is that Sirius XM won't repeat its 125-bagger performance from today's levels, as that would push its market cap north of $3 trillion.
Image source: Sirius XM Holdings.
Around the dial
Sirius XM has never been as popular as it is right now -- as of June, it had 29.3 million self-pay accounts and 34.3 million total satellite radio subscribers. Audience growth is slowing for Sirius XM's flagship offering -- up less than 3% over the past year -- but it's still moving in the right direction. Its purchase of Pandora earlier this year provided it with a popular streaming platform that it can use to extend its reach to a wider potential audience.
Let's start with how we take in radio entertainment, probably the largest cone of uncertainty as we look out to 2029. Like music itself, the medium of consumption itself is perpetually evolving. Two decades ago, no one was paying for radio. A decade later, premium streaming services were just getting started, and Sirius XM (just a year after the merger that gave the company its current form) was delivering satellite radio to less than 19 million subscribers. Today, the three leading streaming services and satellite radio combined have more than 100 million premium subscribers. The market should continue to grow, and while Sirius XM's flagship service is limited by the geographical reach of its satellites, in premium streaming, the outlook has changed now that Pandora is in its arsenal.
New channels matter when it comes to growth, and developing them will be vital for Sirius XM's long-term success. New vehicle sales -- the wellspring from which so many of its new subscriptions flow -- continue to tail off. The auto industry experts at Edmunds forecast that new vehicle sales in the U.S. will slip to 16.9 million this year from 17.3 million in 2018. And it appears likely to get worse. The consulting firm AlixPartners predicts new vehicles sales will fall to just 16.3 million in 2020, and to 15.1 million in 2021.
Shifting into a new gear
Part of that shift is propelled by the fact that the quality of vehicles has been improving, but there's more to the trend than just cars lasting longer. According to the 2018 Cox Automotive Evolution of Mobility Study, 39% of consumers don't think owning a vehicle is necessary, a 4 percentage point increase from three years earlier.
The popularity of car-sharing services is leading some consumers all over to rethink the high costs of ownership, and particularly for younger consumers who move to metropolitan areas with efficient mass transit systems in place, having a vehicle of one's own is becoming even less necessary.
Subscriber growth has been mostly steady for Sirius XM since the 2008-2010 auto industry bailout. (Recessions change everything for industries and investors alike.) Over the past nine years, Sirius XM has reported just one quarter with a sequential decline in self-pay subscribers. The growth rate on that front is slowing, though -- its number of accounts climbed just 2.5% over the past year. Drivers have a growing number of options for audio entertainment in this connected-car era. Sirius XM is finding ways to expand its reach despite easy access to cheaper (or outright free) smartphone music and podcast apps through their Bluetooth-enabled vehicles, but with auto sales themselves on the way down, Sirius XM will need to get more out of its non-satellite radio offerings in the future.
Sirius XM has been investing in more than just Pandora. It acquired the Automatic smart driving assistant platform in 2017, as well as the connected-vehicle services business of Agero in 2013. Given that it already has its foot in the car door thanks to its satellite radio receivers, why not leverage that connection in new ways? Pandora may be a distant third in the streaming audio industry when it comes to paying subscribers, but it's still an industry leader in ad-supported streaming with a lot of room to expand overseas.
The outlook remains upbeat for Sirius XM. It has been able to grow its average revenue per user, and it's just starting to take advantage of the cross-selling opportunities and operational synergies that come with its ownership of Pandora. The stock is on track to provide positive returns for a freakish 11 years in a row, assuming 2019 stays on course -- but it won't stretch that streak to 21. Investors should anticipate some bumps and detours en route to 2029. However, with the right strategic moves and a willingness to disrupt, Sirius XM should continue to beat the market.
