This Radio War has One Winner
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The reason why I like the radio broadcasting industry is because it’s an entertainment based industry. People need entertainment in their daily lives, which makes the demand for this industry quite stable. As the population increases and more people get tech savvy, it is more likely that the revenues of entertainment based companies will increase. Especially companies that are offering technologically new products are likely to benefit and here is a company that we think would make a good investment.
Sirius XM radio (NASDAQ: SIRI) is a satellite radio broadcasting company, which provides its users access to over 140 radio channels. The channels are commercial free, and the users have to pay an annual subscription fee for the services. The company has 4 in-orbit satellites, and 775 terrestrial repeaters ensuring disruption free, clean audio all the time. The New York based company, was founded in 1990, which was originally SIRIUS Satellite Radio Inc., later on merged with XM Satellite Radio Holdings Inc., forming Sirius XM Radio.
Upping the Stake
The stock is receiving a lot of attention these days from around the globe, making headlines quite often. Liberty Media (NASDAQ: STRZA) in an official release, stated that it has increased its stake in SIRI, to 48%, up from 40%, accumulating 90 million shares from the open market, within a week’s time. The company is no doubt trying to increase its control over Sirius XM, and that has proved to be a profitable ride for the investors. The stock recently breached its four year high, and may continue to rally, if Liberty raises its stake further.
Profiting from smartphone growth
Sirius XM has smartphone applications that run on Google's android and Apple's iOS. According to recent releases by Google, the number of android shipments rose to 104.8 million this quarter, from 50.8 million last year in the same quarter. The staggering growth in shipments shows that the growth of smartphones globally is nowhere near its saturation level. By 2016, it is predicted that the number of smartphones on the planet, will cross 10 billion, and any growth in the smartphone industry is a direct growth opportunity for the satellite radio broadcaster.
Beating the competition
Pandora (NYSE: P), the market leader in internet radio broadcasting, raked in most of its revenues from advertising, and that’s what sets the company apart. Sirius XM’s business model revolves around providing its users an advertisement free experience, and it charges its users a subscription fee. Now Pandora has to worry about it advertisement rates, but Sirius doesn’t, as its receiving the fee in subscriptions. In a recent report it was mentioned that, Pandora has more users than it can handle, which has pushed the cost of operations up. Also it was mentioned that Pandora’s users are increasingly migrating from their PC platform to their smartphone platform. Since mobile ads cost less than PC advertisements, the company’s profitability has taken a hit, due to the fall in PC listeners. Also with falling number of PC listeners, Pandora can’t increase its advertisement rates, and can only drop its radio quality to meet its expenses. This struggling competitor gives our company the advantage.
Cumulus media Inc. (NASDAQ: CMLS) is the next competitor in line. This pure-play internet radio company has 570 radio channels and recently raked in $8.1 million in net profit. The company has a net profit margin of only 3.2% and a business model similar to Pandora’s. Cumulus is having more users than it can handle, and the problems faced by this company are similar to Pandora’s.
Sirius XM recently launched a new version of their internet radio, called “Lynx.” The newer version provides the users to route music received on their Lynx, to other music devices, which has significantly increased the interoperability of entertainment devices. The company has also expanded its bandwidth by 25%, to cater the growing number its subscribers.
The recent quarterly results show that net subscriber addition to be around 622,000, which were up by 37.6%. The subscription fee was hiked in January this year, and yet during the first half of the current fiscal year, the radio broadcaster has added over 1million subscribers, bringing the total subscriber base to 22.9 million. The company reported revenues of $3.13 billion for the second quarter compared to around $173 million last year in the same quarter. The huge increase in revenues was accounted as income tax benefits. According to the management’s guidance, the radio provider is looking to add 1.6 million subscribers in 2012. The management being positive in its outlook has upped the revenue expectation from $3.3 billion to $3.4 billion, for the current fiscal year. The earnings and projected growth, when compiled together, make the numbers nothing less than spectacular.
Sirius XM radio trades at 4.89x P/E and 0.22x PEG making it quite cheap. The net profit margin is a massive 107% and the ROE for this year stood at 151.67%. The EPS growth for this year stands at a staggering 874.5%, which make this stock nothing short of spectacular.
Sirius XM offers satellite radio, where its radio peers offer internet radio. The technology advantage itself beats the competition. The company is well placed to take advantage of the growth opportunities presented by the boom in the smartphone industry. Not only does Sirius has good financials, but also good fundamentals. From all the compelling reasons mentioned it’s not hard to figure out why Liberty has raised its stake in the company to such an extent. It is for these reasons that the stock has a buy recommendation.
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