Satellite radio is buzzing these days.
Sirius XM Radio (NASDAQ:SIRI) is closing 2013 on a strong note. The shares hit $3 for the first time in more than four years earlier this week, and the satellite radio provider has never been more fundamentally sound.
Sirius XM is consistently profitable, cranking out gobs of free cash flow, and serving a record 23.4 million subscribers.
Can things get any better in 2013? Well, let's get out my crystal ball and see.
1. Personalized radio will be a game changer for Sirius XM.
There have been a couple of rollouts over the past year and changes that haven't necessarily lived up to the hype.
Remember the push late last year for Sirius XM 2.0? Well, the platform that added roughly two dozen new channels and some new features to a new wave of receivers didn't exactly set the world on fire. This summer's introduction of streaming on-demand content doesn't seem to have lit a fire under the company's ho-hum online subscriptions.
Now, Sirius XM plans to take a page out of the Pandora's (NYSE:P) playbook by offering a similar music discovery service. Why will this new wrinkle succeed where others have failed?
Well, for starters, premium streaming is big business. Spotify has 5 million paying subscribers worldwide. Most of Pandora's users are freeloaders, but we're talking about an active user base that has grown 45% to 62.4 million over the past year.
Sirius XM has struggled to sell stand-alone online subscriptions, but it's a reasonably priced add-on to its more than 20 million receiver-based subscribers. This will make commercial-free personalized streaming radio a compelling offering.
Perhaps more importantly, the ad-supported online radio market is struggling. Music royalty rates are too prohibitive to give streams away, and a shakeout is coming. Apple (NASDAQ:AAPL) will shake up this market in 2013, but it will do more to educate the market than get in the way of what Sirius XM is doing. As more of the free sites nudge customers to premium plans, get acquired, or shut down with Apple's arrival, Sirius XM will be the happy beneficiary.
2. Revenue growth will decelerate, but average revenue per user will continue to rise.
Analysts see revenue growing 12% in 2013, after climbing 13% in 2012. That seems about right. There was a rate hike in January that gradually kicked in on subscribers, explaining why revenue managed a double-digit percentage increase when the subscriber count only grew in the single digits.
However, the likely success of personalized radio getting more receiver-based subscribers to pay an additional $3.50 a month for streaming will help pad average revenue per user, or ARPU. Throw in more subscribers paying the higher rates for the entirety of 2013 and the company's inevitable ability to milk more ad revenue out of its non-commercial-free stations and it's easy to see ARPU moving higher -- but not enough to accelerate revenue growth.
3. Liberty Media will take majority control, spin off its stake to shareholders, and Sirius XM will buy enough shares to close the year with fewer effective shares outstanding than when the year began.
This is a pretty winded prediction, but it's also pretty much a no brainer. Liberty Media (NASDAQ:STRZA) didn't gobble up an effective 49.8% stake in Sirius XM and apply for control of the company without a plan.
If John Malone's history is any kind of teacher it tells us that he will then spin off the stake to Liberty Media investors in a tax-advantaged transaction. It's at this point, under the threat of a wave of selling that Sirius XM will kick in with the $2 billion share buyback authorization granted by its board earlier this month.
Areas where my crystal ball gets murky
I wish I could say that Sirius XM will close sharply higher in 2013 the way that it has done for four consecutive years. It definitely seems that way, especially as this scalable model excels. However, there's still a fair layer of uncertainty as to what will happen if Liberty Media does flood the float by spinning off half of the company. The stock's lofty valuation also doesn't leave a lot of room for error, but that argument has been successfully obliterated by Sirius XM in the past.
It also wouldn't surprise me if James Meyer -- named interim CEO yesterday -- is retained as its permanent CEO. The company will need consistency after Mel Karmazin leaves in February, and an insider is just the ticket to provide that stability.
Another call that I didn't make, largely because it seems so obvious, is that Sirius XM will continue to grow its subscriber base. The auto market is healthy. Sure, a lot of new car buyers are already existing Sirius or XM subscribers. That ratio will grow every year. However, if folks didn't flinch at January's price hike, the stickiness of satellite radio is stronger than naysayers believe.
Sirius XM will have a strong 2013 fundamentally. Let's see if the share price plays along.
Running of the bulls
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Longtime Fool contributor Rick Aristotle Munarriz owns shares of Liberty Media. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.