Sirius: Management Under-promising and Over-delivering

By Ashish Sharma - July 27, 2012 | Tickers: T, P, SIRI, STRZA, VZ | 0 Comments

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Sirius XM (NASDAQ: SIRI) management recently announced its 2Q subscriber net adds of 622K growing 53% QoQ and raised its revenue (from 3.3 billion to 3.4 billion) guidance for 2012. We believe that this growth was mainly fueled by the low churn rates and continuing growth in the reactivation rates for used cars. With Sirius XM's Q2 Earnings call due in August, we rate it as a buy.

Key Positives:

Competition from Internet Radio –The Reality:

Internet radio has been around for years but it was generally used in homes and offices while working on the computer. But now, as smartphones and in-car integration systems are developing, internet radio has reached the automobile. According to many investors, internet radio fares well over Sirius given its lower cost. We believe that the major issue while calculating the costs for internet radio is not the cost of internet radio providers but the cost of bandwidth usage consumers incur from mobile companies. Verizon (NYSE: VZ) and AT&T (NYSE: T) now don’t offer unlimited data plans, which could make internet radio expensive for in-car users. Assuming that a typical American spends 2.7 hours per day in the car, we estimate that one would spend almost $23 per month in data charges to listen to internet radio considering a data cost of $10 incurred per GB of data downloaded and streaming estimated at 64 kilobits per second. Add to the data costs the low charges for internet radio providers, like $3 per month for Pandora (NYSE: P) or $9.99 per month for Spotify; it adds up much higher than the satellite radio Sirius FX offers, which is priced at a basic charge of $14.49/month. As Sirius is priced low compared to internet radio providers on the whole, we don’t expect internet radio to penetrate the base for car radio anytime soon. Apart from that we also believe that Sirius is a better product given its variety of programs and ad-free service on over 140 channels.  

Source: TheAnalystHub.com estimates and the Arbitron National In-Car Study

Used cars - The Future:

We believe that the vast used car market presents a significant growth opportunity for Sirius XM, especially since most cars sold in the US are used. Used cars owners are the ideal customers for Sirius XM. Currently, the company works with over 5,000 Certified Preowned vehicle (CPO) and Non Certified Pre-Owned vehicle (nCPO) dealers to provide three month trials of satellite radio to used cars customers. We believe that Sirius XM may reach a considerable reactivation rate (and hence increasing margins) as they continue their campaign to add more dealers.

Low on expenditure:

Sirius XM is looking at much lower expenses in the coming times as

1)      The royalty costs are being passed on to the customers.

2)      After the launch of Sirius 6 satellite, there is no satellite launch or construction expected until 2017.

3)      No meaningful taxes until 2019 due to $8 billion in NOLs

We believe there are many catalysts in store for Sirius XM. Liberty Media (NASDAQ: STRZA) currently has a ~46% stake in the company and there is a decent possibility of a potential spin-off before the year end. Sirius, with its ability to leverage strong relationships with automobile manufacturers and dealers, could generate upside revenues in the coming quarters and therefore we rate it as a buy.

Note: The article was originally published on TheAnalystHub.com. For more in-depth research articles please visit our site today.

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