Sirius XM Holdings (NASDAQ:SIRI) has been one of the market's biggest winners since bottoming out at $0.05 -- yes, a nickel -- a little over five years ago. The satellite radio provider, which was seemingly left for dead by Mr. Market on fears that it would file for bankruptcy, turned things around, and is now a consistently profitable exchange citizen, cranking out gobs of free cash flow.
Things can always go wrong for any publicly traded company, but let's take a look at some of the things that could get Sirius XM to move higher in the near future.
1. Growth could begin to accelerate
It doesn't take a rocket scientist to know that good things should continue to happen for Sirius XM as long as its popularity continues to grow -- and that hasn't been a problem so far. Paid promotional subscribers have grown sequentially every single quarter over the past five years, save for last year's holiday quarter when an original equipment manufacturer shifted to unpaid trials.
Despite the growing popularity of streaming apps -- led by Pandora (NYSE:P) -- that are easily accessible in today's connected car and a pair of price hikes over the past three years, Sirius XM has managed to keep its account base growing.
Sirius XM is also milking more money out of its broadening base. Self-pay subscribers inched a modest 8% higher in 2013, but revenue and free cash flow climbed 12% and 31%, respectively. A similar trend -- with free cash flow outpacing revenue growth, which in turn should move up higher than subscriber count -- is expected in 2014. Subscribers inching higher helps, but it will be bigger for the company's bottom line when that pace accelerates as the number of cars on the road with satellite receivers continues to expand.
2. More magnetic content could sign up
With more than 26.3 million subscribers available, it's easy to see why radio celebrities have been following Howard Stern to satellite radio. It's where audiences are listening. As a premium radio service, it's also a way for radio and even TV icons to escape terrestrial radio to reach folks with money to spend.
That's not the only reason that Sirius XM is an attractive landing spot for potential talent. The company is also in a pretty good place as far as money is concerned -- it's going to ring up more than $4 billion in revenue this year, giving it more money to spend on content than anyone else.
Some will argue that Pandora attracts nearly three times as many unique listeners as Sirius XM has subscribers -- but it won't even hit $1 billion in revenue this year. Most of its users are freeloaders, with roughly 20% of its revenue coming from subscriptions that amount to less than 5% of its total user base. Major tech companies are making a big push to matter in digital radio, but they're not raking in $4 billion a year to justify needle-moving content deals. Sirius XM is.
3. Media consolidation will drive up valuations
A gargantuan media merger came undone a few days ago, but this doesn't mean that the appetite for content providers and distributions is dwindling. The rapid migration to digital media is making it more lucrative to be a content creator, and Sirius XM is positioned nicely.
It's not just that Sirius XM is a monopoly when it comes to satellite radio, though that naturally helps. Unlike satellite television companies and other distributors, Sirius XM is free to carry what it deems fit, including as much proprietary content as it can bankroll. Many TV buffs wouldn't even consider a cable service that didn't provide ESPN or HBO, but it's a different world in premium radio, where Sirius XM can cherry-pick the content it broadcasts.
The ability to control its own destiny in terms of content is a rare treat for a platform. This may not make Sirius XM a buyout candidate itself, as there aren't too many companies that could afford it as a subsidiary, but continuing consolidation will drive perceived values of successful media companies higher. Sirius XM should be able to go along for the ride.