A Sirius Risk?—Why Sirius XM Warrants Caution

Olek is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Note: This post contained inaccurate information about the price of shares. It has been updated.

A lot of people love to hate Sirius-XM Radio (NASDAQ: SIRI). A lot of people just plain love it too. Since this time last year, shares are up over 38%, up over 74% from the 52-week low of 1.78—is it too good to last?

“Why would anyone pay for radio?”

That’s the question thrown around by a lot of Sirius-XM naysayers. According to the latest figures, a little under 23 million people found a reason. In fact, the number of Sirius subscribers grew consistently over the past 3 years, 5% in 2010, 8% in 2011, and 9% in 2012. Those are impressive figures, especially when subscriptions make up 87% of revenue. Still, the question more relevant to investors remains unasked: How many people would pay for radio?—more precisely, How many more?

For what it’s worth, Sirius-XM is a definite upgrade from traditional radio, and that’s something to put a price on. Sirius is commercial free; it has a unique array of programs; streaming radio shows on-demand is an appealing notion; but plans at $14.49* a month? That’s $14.49 with an asterisk, not to mention that an internet plan is extra.

Granted, buried in the corner of the Sirius-XM site, one can unearth a limited package for $7.99*. That’s more reasonable, until the consideration that Netflix charges the same amount to stream video. At these prices, Sirius-XM is a luxury, especially when the competition offers most of the same products free. That doesn’t bode well for long-term growth prospects, no matter how rosy the past 4 years have been. 

The Competition

Pandora Media (NYSE: P) currently appears to be the largest competitor to Sirius-XM. To be fair, Pandora’s personalized radio is somewhat different from Sirius-XM’s commercial-free channels. Likewise, it lacks news and other specialty programs that have thus far set Sirius-XM apart. But the most striking difference between the two is that 88% of Pandora's revenue comes from advertising, about the same percentage Sirius-XM gains directly from subscribers. Here lies the problem: any Sirius-XM subscriber can still listen to Pandora, while not every Pandora listener may want to purchase a Sirius-XM subscription. Essentially, Sirius-XM’s growth depends on a myriad of quality and economic factors. Meanwhile, Pandora’s depends almost solely on accessibility. That accessibility has been growing.

According to an article in the Feb. 25issue of the Wall Street Journal, General Motors announced that it would include 4G technology on its 2014 models, a move part of a growing trend among automakers to increase in-vehicle connectivity. This will bring Sirius-XM in much more direct competition with not just Pandora but every internet radio provider. Until now, internet radio listeners had to rely on their smart phones to stream in their cars; in the new models, it’ll be as easy as adjusting the radio dial.

The Numbers

<img src="http://media.ycharts.com/charts/21475ba3e1088453cc87ae5a996355c8.png" />

SIRI data by YCharts

Considering the obstacles, what justifies the 2012 jump in share price? Of course there was Liberty Media Corp purchasing its stake, but what about Sirius-XM the company?

Subscriptions were up in 2012, yet this was the continuation of a pre-existing trend. Revenue and gross profits advanced fairly linearly. Long-term debt was down 17%, though I don’t know if I’d call that a rallying cry. Most importantly, subtracting the massive $3 billion tax benefit leaves the 2012 EPS at $0.05, $0.02 lower than 2011’s $0.07. That has some negative implications for margins. For shares trading at $3.10, this also brings the P/E up from a deceptive 6 to—62. The P/E ratio isn’t a perfect indicator, but as it stands, it implies some very lofty expectations.

The bottom line: Sirius-XM still has a unique niche to fill, though one much smaller than many seem to expect. For shareholders, this could mean stagnation if not outright decline.

LlamaGuy211 has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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