Maxim Group's John Tinker turned heads in initiating coverage of Sirius XM Radio (Nasdaq: SIRI) with a "buy" rating last week.
It's not necessarily the $1.40 price target or the evolution of the satellite-radio provider to the point that it can actually be valued based on future cash flows. Tinker's most surprising nod actually comes in comparing Sirius XM to the mother of all e-tailers.
"We believe that Sirius XM Radio is the Amazon.com of the radio space," he writes. "Sirius XM improves upon local radio with 130 channels and a combination a high-profile personalities, sports, and themed music."
Is this the first time that an analyst uses Sirius XM and Amazon.com (Nasdaq: AMZN) in the same sentence? It may be. The two companies have little in common, for the most part. Despite its arsenal of physical and digital distribution, Amazon has limited exposure to subscription models.
Amazon has its "Subscribe & Save" program for discounted recurring orders. There are also magazines and periodicals through Kindle and its Audible.com digital audiobook service. However, Amazon's popularity stems largely from its ability to deliver media and other wares at lower prices than conventional retailers. Sirius XM, on the other hand, comes at a premium to traditional audio offerings.
Tinker's comparison, naturally, implies that Sirius XM will corner the radio space the way that Amazon has dominated web-based retail.
Amazon stands alone
Is there any serious competitor threat to Amazon over the next few years? There is one notable competitive threat to Amazon -- state sales tax legislation that may eat into Amazon's pricing advantage on a state-by-state basis -- but there is really no competitor threat.
Wal-Mart (NYSE: WMT) is probably as close as it gets for Amazon. Wal-Mart is the world's leading retailer. It's famous for its inventory turns and data mining efforts, making it a natural as a price leader in cyberspace. However, it's too entrenched in its bricks-and-mortar ways to get in the way of Amazon's torrid growth.
Amazon's net sales soared 42% during its latest holiday quarter -- pretty bold steps for a company with nearly $25 billion in sales last year. However, by taking an early lead in online retail and encouraging customer loyalty through its Prime membership program, Amazon has managed to build a significant moat in an industry where every rival is a click away.
Sirius XM also stands alone
Is there any name other than Sirius XM that comes to mind in discussing premium radio? There shouldn't be. Terrestrial and enhanced HD radio is free. Pandora offers a premium subscription -- where folks pay $3 a month for higher quality, ad-free streams -- but the music discovery site is widely enjoyed as a free site.
The nearest match to Sirius XM would be the subscription-based streaming services. However, despite blue-chip backing in Microsoft (Nasdaq: MSFT) with the Zune Pass and Best Buy (NYSE: BBY) with Napster, these are niche offerings. The canvassing of smartphones are making in-car connectivity easier than ever, but these services aren't gaining any kind of automotive traction. If they haven't gone mainstream now, they probably never will.
Pandora, Napster, and Zune Pass are also limited to pre-recorded music, lacking the live programming that differentiates radio from just slipping in a CD or shuffling through a media player.
Sirius XM has grown to 19.5 million subscribers, seemingly uncontested. It's hard to fathom any serious challengers. Automakers already have deals through Sirius or XM for factory-installed receivers with meaty incentives to match. Who's going to disrupt that?
The only realistic threat would come from the likes of Apple (Nasdaq: AAPL) and Google (Nasdaq: GOOG), if they should ever take advantage of the growing iOS and Android user bases to launch premium radio offerings.
This may very well happen. Apple acquired music-streaming specialist Lala back in December and Google Music is arming itself accordingly.
Having said that, guess who already streams premium radio through iPhones and Android handsets? Yes, Sirius XM.
Tinker's comparison works. Sirius XM may never approach Amazon in terms of net sales or market capitalization, but there's no reason why Sirius XM can't grow to be the one with healthier profit margins in a few years. Along the way, both have bigger moats than cynics give them credit for.
It matters -- and you know it.
Can Sirius XM grow to sport thicker net margins than Amazon.com? Share your thoughts in the comment box below.
