Sirius XM - Huge Long-Term Catalysts

Nov.19.13 | About: Sirius XM (SIRI)

Shares of Sirius XM Radio (NASDAQ:SIRI) have increased more than 3000% since reaching a closing price low of just 6 cents on February 11, 2009. There were almost 280 million shares traded that day and over 1 billion shares changed hands that week. Sirius XM was on the brink of bankruptcy and investors were running for the exit. Ultimately, Sirius XM survived and is now a thriving company throwing off a huge free cash flow. Despite the stock soaring over the last 4 years, shares still have a lot of room to keep appreciating.

Although Sirius XM is not currently trading at a cheap valuation, the company is still on track to deliver solid results and growth is projected to be strong for years to come. Investors have been handsomely rewarded and there is no reason to expect the party to end anytime soon. This article will explore how Sirius XM will continue executing its business strategy and why investors will likely drive shares higher by 100% in the next few years.

Investor Perception

Sirius XM has been a darling stock for almost five years but it has not received the respect and attention that it deserves. Many in the investing community still see Sirius XM as a broken company with highly diluted shares perpetually stuck in penny stock territory. They look at the long term stock graph and see nothing but loses. After reaching a high of over $60 in 2000, the stock has been treading water under the $10 mark for the last 12 years. These observations are superficial, but they are correct. Sirius XM shares have been trading at a penny stock nominal value, by definition, since 2006. Despite all the positive news about the company, this stigma persists and has been a massive force constraining larger institutional and retail investor ownership.

Although this concept of perception is rather unquantifiable and anecdotal, most shareholders would admit that from an investor perspective, Sirius XM has been haunted by its past. Tainted by years of losses, a roller coaster stock price, massive share dilution, an excruciatingly tense merger approval process and a close call with Chapter 11, many investors dismiss the company before even looking at its financials. Surely if Sirius XM had a better reputation within the investor community, there would be wider ownership, more new coverage and general interest in the company. This would translate to a higher share price and more buzz surrounding the company's products and offerings.

As Sirius XM continues to execute its business strategy and drive growth higher, it's reputation should heal. When the shares appreciate above the magic $5 mark, new avenues of investor ownership will appear. As Sirius XM receivers continue to become ubiquitous within all vehicles, the public will take notice to a far greater extent. With well over 50 million factory installed Sirius XM receivers currently in the USA, it is with sincere hope that the American population will soon talk about Sirius XM with the same intensity and frequency they use when referring to Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB) or Netflix (NASDAQ:NFLX). Sirius XM is a consumer technology product which lacks buzz. That should change in the future which will help, albeit in an unquantifiable way, drive the stock price higher.

Leveraging Strategic Relationships

Sirius XM has been focusing on the OEM market for the last few years. By signing long term installation contracts with all major vehicle manufacturers it has been able to ramp up OEM installation rates and its subscriber numbers have become predictable and consistent. By offering incentives to used car vendors, Sirius XM is working to ensure that as many in-vehicle radios as possible remain active and continue generating profit. With a business model which is basically a monopoly with negligible marginal costs to adding new subscribers, this tactic has really been the catalyst behind the company's expansion and profitability.

Going forward, now that the company is firmly profitable, Sirius XM will begin investing more to attract retail (non-vehicle) consumers. This approach will involve signing installation agreements directly with large stereo and television manufacturers like Sony (NYSE:SNE) and Samsung. As most of these products will eventually have WIFI integration, Sirius XM will likely use their streaming internet audio service to deliver their content. OEM contract will call for native Sirius XM integration into internet radios and a trial subscription. A dedicated satellite receiver will not be necessary. By streaming Sirius XM channels over WIFI, costs will be controlled and the user experience will not be compromised. Internet radios will one day become as ubiquitous as AM/FM receivers currently are. Sirius XM should be able to use their clout and experience, as well as leverage their relationship with Liberty Media (NASDAQ:LMCA), to position their service optimally for integration and consumer adoption.

The same strategy will be used as Sirius XM makes strides to penetrate the mobile device market. There is far more competition for user attention in the mobile market, but given the massive size of the opportunity, even a small adoption rate will mean huge subscriber gains. Sirius XM has recently released a major update to its phone apps and is pushing to attract users on all platforms. Currently Sirius XM is offering apps for Android, iOS and Kindle. It's main competitors in the mobile space are Pandora (NYSE:P) and the Apple iTunes service. Sirius XM has a huge advantage over Pandora and all other streaming services due to its exclusive content and live sport event coverage. There is massive demand for these offerings and Sirius XM is likely working on signing lucrative deals with major mobile device makers to have their radio apps pre installed on devices.

International Markets

Investors have been speculating for years that Sirius XM would make a play to expand into international markets. So far this has not happened, for good reason. The costs to expand internationally are extremely high and the regulatory environment will be tedious. But now that Sirius XM is a profitable company it will likely use the support and leverage of its relationship with Liberty Media to expand outside of the US and Canada.

As has been outlined many times, international expansion is far from a simple matter, but Sirius XM CEO Jim Meyer recently said the company is looking at entering the Mexican market. Given the proximity to the US and the many shared cultural aspects, expansion to Mexico would likely be a cost effective experiment for Sirius XM to launch and test its product offerings. It's probable that the expansion into Mexico follows a similar strategy as the US consumers are accustomed to. Coverage over most of Mexico could be achieved using the existing satellite system, supplemented with a low cost repeater network. Sirius XM would then have to tailor and create custom content which would be engaging enough for consumers to see the value in the service. It's a process, but it's an important and lucrative step that Sirius XM will endeavor to start within the next 2 years.

Liberty Media Chairman John Malone has said that Sirius XM should look at "globalizing" the service. It's a broad term to use and he did not give a timeline for the rollout, but at least we know that Sirius XM realizes the potential for international growth (outside from Mexico) and analysts somewhere in their corporate headquarters are actively calculating the opportunity cost of such a move.

Whenever the company does finally decided to expand internationally, investors should consider that the company is unlikely to follow the same content delivery system as it does in the North American market. Jim Meyer has said that the company would likely focus on being a central part of the connected car strategy being introduced by auto manufacturers on a global scale. Rather than building satellites to broadcast to international users, Sirius XM could stream their channels directly to a "connected car," via the internet. The costs to roll out this type of system would be far lower than satellite transmission. Moreover, Sirius XM would use its current ties to the global automakers to negotiate exclusivity or at least prominent placement as the connected car radio streaming service of choice.

International expansion will be slow and adoption rates can be expected to be lower than those in the North American market, but the company knows that the addition of these marginal users will drive growth over the next 10 years. Making small strategic investments in promoting the service to international users now will have a huge payoff once the North American market becomes saturated.

Conclusion

After suffering so long, Sirius XM investors are finally starting to see the company live up to all its potential. Shares have shown large gains over the last five years and the company is solidly profitable with a massive subscriber base. Looking at future catalysts both for the share price and growth prospects, investors should be smiling. It is a comforting feeling to own shares in a company which seems to really be executing its business plan perfectly and has so much potential for future growth. Although the media space is highly competitive, Sirius XM is fundamentally a monopoly and going forward all the company has to do to remain successful is to continue providing a top rate user experience and expand the service to as many eager subscribers as it can find.

Disclosure: I am long SIRI. 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.