Sirius XM Radio, Inc. (NASDAQ:SIRI) spent some of its projected $915 million free cash flow this year to broaden its business horizon. The satellite radio company announced on November 5 that it has completed its purchase of Agero's Connected Vehicles Services Division. Sirius originally announced this deal last August.
Sirius paid $530 million in cash for this acquisition and the company plans to rename it to Sirius XM Connected Vehicle Services, Inc. Jim Meyer, CEO of Sirius XM, explained that his company is very pleased with the purchase because it will accelerate Sirius XM's move towards telematics and connected vehicle services market.
Synergy in Diversity
Sirius XM's latest diversification is in perfect synergy with its core business. I therefore applaud this acquisition because it fortifies its current dominant presence in car radios. Sirius is already benefiting from the rise in automotive sales. This move towards telematics is just brilliant on the part of the management.
The company's bottom line will definitely benefit from providing connected vehicle services to several car manufacturers that includes Toyota (NYSE:TM), Nissan, Lexus, BMW, Infiniti, Honda, Acura, and Hyundai. Just like Agero's core business focus, Sirius also plans to offer security and convenience services for automobile owners.
However, Sirius XM will initially use its infrastructure and expertise in satellite radio transmission for targeted infotainment and advertising. The company is already raking in billions of dollars in monthly subscription fees from its more than 25 million customers.
The additional income from connected vehicle services might just improve its profitability. Investors have been groaning about the company's history of low earnings per share. Advertising subtly masked inside infotainment, if done right, is a cash cow with high profit margins.
This new venture also lessens Sirius XM's exposure to a drop in subscriptions. Diversity of income is always good for any business.
Telematics is Big
Telematics is not only limited to satellite connectivity. Sirius XM can also use its new division to make strategic partnerships with telecom operators or smartphone app developers. Telematics also applies to internet-connected vehicles. Artificial intelligence in car and driver interaction is another opportunity worth exploring.
Serious money can be made from telematics smartphone apps for drivers. Honda Motor Company, Ltd. (NYSE:HMC) announced in June that they are developing a telematics app called "HondaLInk." That concept application utilizes the phones that most people already own to let cars communicate with drivers and the Internet.
A telematics app can provide technical information about the condition of the automobile, traffic situations, maps, hotel & restaurant guides, and safety warnings to drivers. Acura, the luxury vehicle division of Honda is already scheduled to install its telematics app, "AcuraLInk," in their 2014 models. Sirius can also replicate this in-vehicle infotainment service.
Sirius XM's entry this month in telematics means it is in a great position to profit from the predicted rise of phone integration in cars. ABI Research predicts that by 2018, up to 35.1 million vehicles could have embedded smartphone systems.
Positive Market Reaction
Some investors are happy with this new venture of Sirius. There's a new December 6 call option for SIRI at the $4 strike price. Sirius stock is now trading at $3.71. NASDAQ's community ratings has given Sirius XM a bullish 80% buy score. NASDAQ's group of Wall Street analysts also agree and their consensus recommendation is BUY for SIRI.
TheStreet has also given SIRI a grade of B for buy. Sirius XM's year-to-date performance is +31.14%.
The high 50.5 P/E ratio of Sirius XM means a lot of investors have high hopes for it. They are betting big on the company in spite of its very low earnings per share performance. The company has performed well, with a constant increase in annual revenue.
Now that it is also smartly diversifying outside its pay-radio, Sirius has a great future ahead of it. Its foray into telematics adds more implied worth to its fair share value.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.