Sirius XM Radio (SIRI 1.29%) has been doing well, but the company's stock price hasn't. After its recent earnings report, shares fell even though it reported record subscribers, revenue, and free cash flow. Even if the company doesn't complete the deal with Liberty Media (FWONA) to go private, the stock has the potential for price appreciation due to its strong financial position and growth in operating metrics.

Strong fundamentals 
In 2013, revenue increased 12% year over year to $3.8 billion. And Sirius XM added 1.66 million subscribers in 2013, capping off the year with 25.6 million customers. In 2013, the operating income of Sirius hit record highs to $1.04 billion, which points to an operating margin of 27.5%.

Net income stood at $377 million, which translates into an earnings per share of $0.06. Sirius XM is generating a ton of free cash flow, which increased 31% in 2013 to $927 million. The company bought back 520 million shares for $1.76 billion last year, and there is still more than $2.2 billion of share buybacks that are yet to be executed. The remaining $2.24 billion repurchase authorization represents more than 10% of the company's market cap of roughly $21 billion, so the company is clearly betting big on its future.

Metrics are growing
The company's self-pay subscribers increased to 21.08 million from the prior quarter of 20.67 million. And the conversion rate of new vehicles stood at 42% while the churn-rate of self-pay users increased to 1.9% from 1.8% in the prior quarter. These two factors were negatively affected by one major OEM, which shifted to unpaid trials from paid ones, and caused net additions to decline by roughly 23,000 subs in the fourth quarter.

However, the company's average revenue per user, or ARPU, grew to $12.46 which is a notable increase from $12.12. And also the subscriber acquisition costs of Sirius declined to $42 per gross addition as the company is aggressively expanding its footprint. The company's satellite radios have been installed in more than 60 million cars, and is hoping to increase this to 110 million in the next five years. 

Broadening the addressable market
The company's future growth can be expected to flow from the used car market in the U.S., which is 3 times the size of the new car market. Sirius XM expects that the number of pre-owned cars, with satellite radios, should surpass the number of new cars with its radios in the next few years. The company's conversion rate among used cars is 34%. It's trying to reach more used car owners when they service their vehicles with participating dealers by providing free trial offers.

New car sales in the U.S. stands at roughly 16 million units per year, and that should aid the company's subscriber growth. Sirius has been able to penetrate 71% of new cars in 2013, and the company's management anticipates that penetration rate to be 70% in the current year. 

And since Sirius has revenue-sharing agreements with a number of OEMs, the interests of both parties are well-aligned. Sirius is the world's largest radio broadcaster, but the company still faces decent competition from free terrestrial radio as well as Pandora Media (P) Pandora is the leading Internet radio service with more than 73.4 million active listeners at the end of Jan 2014. In addition, Pandora is working on automotive partnerships with leading car-makers such as General Motors, Toyota, and Nissan.

But Sirius XM offers a commercial-free radio experience and includes differentiated content including music, news, sports, and talk shows, which represents a different experience relative to Pandora, Spotify, and terrestrial radio. And Sirius is also strengthening its OEM relationships; the company increased its penetration at Honda and Toyota in 2013 and extended its agreement with Nissan for all models to 2018.

Sirius XM has taken steps to diversify its revenue streams through the acquisition of leading telematics services provider Agero, which will enable it to generate more revenue through safety and security-related solutions and also strengthen its relationships. The connected-vehicles segment is expected to earn revenue of almost $100 million this year and grow in double digits the next few years.

Going forward
The subscription business model of Sirius XM ensures that the company's cash flows are reasonably predictable and consistent. Its operating margin expanded to 27.5% in 2013 from 25.6% in 2012, and the scalability of its business model will aid further margin expansion in 2014 and beyond. In addition, the company is buying back more than 10% of its outstanding stock, which should lead to a higher EPS.

A higher bid from Liberty Media, from the existing $3.68 per share all-stock offer, or by remaining public, Sirius XM still has a lot of upside from its current levels. It's hoping to add 1.25 million net new subscribers, generate record revenue, and free cash flow.

Sirius XM is already one of the largest subscription media companies in the world, and in the distant future would like to expand its footprint in the International market. All these factors could pave the way for huge upside.