When reading about investments, one will come across opinion after opinion focused upon various facts and figures. Often times an individual will focus upon the metric or metrics which they can use to support their argument, tone, or position towards or against that investment.
In the case of Sirius XM (SIRI), I have seen it mentioned over the years that the ominous 'declining growth' should be at the front of investors' minds when considering whether to add to, hold, or sell their investment. But is declining growth on a percentage basis so bad? I don't think so, and I don't think it's something that investors should be particularly concerned about at this moment in time.
The way I look at it
In a way, I see Sirius XM as a big bucket with a little hole in the bottom.
In the most simplistic way of looking at it, water (subscribers) pours into the top and fills the bucket. Think of this as those who convert to paying subscribers from Sirius XM's free trials in new vehicles combined with other streams of new subs such as retail radios and used car programs that expose the buyer to satellite radio.
The hole in the bottom drains water (now ex-subscribers) through the self-pay monthly churn which has remained between 1.8% and 2% of the total water in the bucket. As the bucket fills, more water flows out.
In this simple system, the increase in water level over time is proportional to water in vs. water out.
If one wishes to get into the more complex mathematics of what is a simple system, you can visit this link here.
Making it more complex
Obviously, the subscriber totals from one year to the next are not so simple. One can make the bucket example more and more complex. For instance, some of the subscribers who cancel are simply buying new cars. Think of this as a little pump taking a percentage of the water draining out of the bucket and making up a portion of the water pouring into the bucket. As the stream coming out of the bucket gets faster, the pump pushes more of this water into the top again.
We know that some who cancel, will resubscribe or are simply moving vehicles. Churn is account churn, and does not mean that all account cancellations are unsatisfied subscribers. If they were, out of 50 million satellite radio equipped vehicles it would be impossible for half of them to still be subscribers to Sirius XM if nearly a quarter of them "cancel" every year. Think about it.
While it may be an interesting exercise for some, I don't feel it's that important to dig into all the bits and pieces of the system. I simply wanted to point out that yes, this is far more complex. But for the purposes of understanding growth, a general concept will suffice.
How this relates to declining growth
When discussing growth one can look at it in two ways. There is growth by percentage, and growth by absolute value. If I have $1,000 and I add $1,000, I have grown my savings by 100%. If I have $10,000 and I add $1,000, I have grown my savings by 10%.
In each case, though, I have grown my savings by $1,000.
There's a similar relationship to Sirius XM's subscriber model. When Sirius XM had 10 million subscribers, adding 2 million new subscribers resulted in a growth rate of 20% year over year. Sirius XM with 20 million subscribers adding 2 million new subscribers is a growth rate of 10%.
That can be spun as a very negative thing. I've heard this declining growth mentioned since I invested in the company first back in 2008.
It's not a negative thing
And it's not a negative thing. Not right now. Why? Because growth in total subscribers has remained at a fairly linear rate of appreciation over the past several years. It makes sense, too, when you consider that only so many vehicles are made every year, and the size of the satellite radio equipped "fleet" is appreciating in a linear fashion.
So as the subscriber base increases and if the growth of subscribers increases at a linear rate roughly following the total number of satellite equipped vehicles, then the growth percentage will steadily decrease.
I touched on why this was not a problem back in January.
Investors should consider that net gains, once costs are paid for, drive profits. Sirius XM's added costs per subscriber are generally less for each new subscriber. Satellites are in place, employees are paid, content is paid for, and royalty fees are passed on to the customer on a per customer basis. Incremental cost increases per subscriber are marginal, such as customer service costs, and thus each additional subscriber is "worth more" in terms of profitability.
This is absolutely critical to understand. Assuming revenue per user, or ARPU, remains steady or increases, 2 million net subscriber additions in 2013 are more valuable than 2 million net subscriber additions in 2012.
And this is the part that those screaming "decreasing growth" seem to fail to understand, or pretend not to. Each new subscriber, assuming a relatively steady or increasing ARPU, is worth more than each old subscriber. Sirius XM does not need to maintain double digit percentage growth in subscribers in order to drive profitability, especially as the base of subscribers gets larger.
With the recently announced successful launch of the FM-6 satellite, all major expenses are complete for the next several years allowing more cash to be channeled towards things like share buybacks in order to return that extra capital to investors.
Am I being careless?
No. These are relatively simple ways of looking at an intricate process and some may argue that leaves one open to error. One can just as easily provide a counter argument that digging into every little intricate detail may cause one to miss the big picture.
And the big picture of Sirius XM is one of increasing subscribers, increasing revenue per subscriber and decreasing costs per subscriber. These things, combined with the shrinkage of shares outstanding through Sirius XM's extensive (now $4 billion) share buyback program will all work together to drive Sirius XM's share price going forward.
Will Sirius XM's subscribers eventually reach an equilibrium? Of course. At some point the majority of vehicles on the road will have an installed Sirius XM radio, and at some point deactivations will equal (or even overtake) new activations. It's simply common sense that any subscription service cannot grow to infinity.
For Sirius XM, though, this will not happen in 2014 and the company remains my preferred investment for the coming year.
Additional disclosure: I am long SIRI January 2014 $2 to $3.50 calls.