Satellite Radio Has Advantages Over "Free" Radio

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Since bottoming out during the depths of the recession, Sirius XM Radio (NASDAQ: SIRI) has come back in a big way.  This company, whose shares trade for around $3, traded for as low as 5 cents per share in 2009.  To put this in perspective, at one point the company had a market cap of just over $300 million dollars.  Today, Sirius XM's market cap has topped $20 billion and has been profitable for the past three years, proving that there is indeed a viable market for pay radio.  With increasing competition from free services like Pandora (NYSE: P), and speculation of Apple (NASDAQ: AAPL) starting its own radio service, is there still growth ahead for satellite radio, or should shareholders take their gains and run?

The Growth of Satellite Radio

Over the past decade, Sirius XM (formerly just Sirius Satellite Radio) has grown its revenues tremendously, from just $13 million in 2003 to $3.4 billion this past year.  Sirius XM offers commercial-free music, as well as a wide variety of news, sports, and other programming.  The service is actually very affordable at just $12.95 per month, which I find very low considering the wide variety of stations to choose from.

Sirius XM has increased its cash flow so much that in December the company issued a special dividend, in addition to announcing a $2 billion share repurchase plan. 

Projections

Sirius XM is projected to earn 11 cents per share this year, meaning that shares trade at a relatively high valuation of about 28 times earnings.  However, the company is projected to grow its revenues by over 10% this year and by 9.4% next year, which is expected to result in earnings of $0.13 and $0.15 per share in 2014 and 2015, respectively.  This translates to annual forward earnings growth of about 17%, which justifies the valuation, if the company can deliver.

Threats

So, what could stand in the way of satellite radio?  Terrestrial radio stations aren’t that much of a threat nowadays, and the only serious threat is from internet radio, which has dramatically evolved over the past several years.

By far the most popular internet radio service is Pandora, which offers both free and paid streaming internet radio, with channels customized to listeners’ preferences.  Pandora recently announced that it has reached 200 million registered users in the U.S.  I think that Pandora is a great company with a great business model, but due to the uniqueness of Sirius XM’s programming I don’t see it as a serious threat.  However, revenue growth like Pandora’s is hard to ignore, growing from $19 million in 2009 to $427 million last year.

A “wild card” is Apple’s plans to launch a streaming radio service, which is continually the subject of market gossip.  I would view an Apple radio service as more of a threat to Pandora than to Sirius XM. 

Apple’s radio project has been delayed several times, reportedly because Apple wasn’t willing to offer competitive payments to record companies.  Lately it seems like Apple is realizing that it’s lowball offers are not realistic, and it was reported this past week that Apple is on the verge of an agreement with Universal, the largest of the major record companies.  The latest rumor is that the “iRadio” is set to launch this summer; however, it remains a rumor for now.  I love Apple as an investment, especially in the low-$400 range where it currently stands.  As far as the radio goes, until there are any concrete details, there is no reason to think it will even compete with Sirius XM for listeners.

The Bottom Line

Satellite radio is a young, growing business that should produce great returns as the economy improves.  Economic improvement will result in increased new car sales, which is where a large percentage of Sirius XM’s new subscribers come from.  How far Sirius XM can go remains to be seen, but as long as they keep offering programming that is in demand that listeners can’t get elsewhere (such as Howard Stern), satellite radio should have no trouble retaining its existing subscribers and attracting some new ones as well.


Matthew Frankel owns shares of Apple and Pandora Media. The Motley Fool recommends Apple. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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