Sirius XM Radio (Nasdaq: SIRI) took a breather in 2011.

After watching its shares pop fivefold in 2009 and more than double in 2010, the satellite radio giant is eyeing a more pedestrian gain of 12% as this year winds to a close.

This certainly doesn't mean that Sirius XM has had an off year. The company's fundamentals have improved throughout the year, generating consistently growing profitability and gobs of free cash flow.

This doesn't mean that everything has been perfect.

  • Sirius XM still has a legal tussle going on over performance-based stock grants with its most magnetic celebrity, Howard Stern.
  • The hyped rollout of Sirius XM 2.0 -- the platform's first across-the-board update -- has been off to a slow start.
  • Conversion rates, essentially the percentage of new-car buyers who continue to pay for the service after their free trials run out, have been shrinking in recent quarters.

However, Sirius XM is still on pace to close out the year with 1.6 million more subscribers than it had at the beginning. The larger audience will come in handy when Sirius XM raises its rates next year, hoping that the modest 12% increase doesn't rub too many of its listeners the wrong way.

The crowded dashboard
Things got hairy in January, when Toyota (NYSE: TM) introduced its Entune multimedia system. Smartphone-owning drivers in cars with Entune can now use a dashboard touchscreen to beef up the ear candy. Clear Channel's iHeartRadio and Pandora (NYSE: P) are two of the six icons featured prominently when Entune fires up.

Sirius XM has fared well competing against terrestrial radio, but the competition gets stiffer when it's pitted against hundreds of Clear Channel stations through iHeartRadio and music-streaming websites including Pandora, Spotify, and CBS' (NYSE: CBS)

We don't know if the proliferation of Bluetooth streaming through new Toyota and Ford (NYSE: F) cars has played a part in declining conversion rates or if it's just a response to the soft economy. However, since 2011 also happens to be the year that Pandora went public, it's an important development that will either threaten Sirius XM's growth or present it with a golden opportunity to grow the reach of its own Internet streaming service.

Kudos to Sirius XM
The 2011 stock chart may not seem worthy of confetti, especially given the equity's performance since peaking at $2.44 a share back in May.

However, this was a successful year in terms of operations. Margins expanded. Programming and content costs have actually gone down over the past year. Churn held steady.

There may be too many shares outstanding for the company's own good, but Sirius XM is no longer a speculative poker chip. Satellite radio is legitimate, profitable, and growing.

There are things far worse than just a modest stock gain this year.

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