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Summary

  • Sirius XM’s turnaround story has been impressive. The company has performed consistently.
  • Even though Sirius has a good conversion rate in the automobile market, its growth is slowing down.
  • Spotify and Apple’s CarPlay can hurt Sirius’ sales in the future.
  • I think investors should stay clear for now.

After putting in a weak performance in 2013, Sirius XM (NASDAQ:SIRI) is looking to set things right in 2014. Its recent fourth-quarter results were encouraging as Sirius beat estimates and the outlook was also steady. Despite facing a lot of competition from a multitude of peers such as Spotify and Apple (NASDAQ:AAPL), Sirius is focused on growing its business steadily and it is making a lot of moves to get better. Let's take a look at what plans this satellite radio service company has for the future and also the potential problems it could face going forward.

Sirius' moves

Sirius has been growing consistently over the past one year. The satellite radio service can be heard in cars, laptops, mobile, and other devices. With new car sales estimated to be about 16 million per year this year, the radio operator can expect the good times to continue. Presently, Sirius has only 25% share of the active cars on the road. To increase this, the company is entering into agreements with various auto manufacturers.

Last year, Sirius penned deals with Toyota (NYSE:TM) and Honda (NYSE:HMC), while this year, it extended its contract with Nissan. Sirius is projecting a total of 11 million cars fitted with satellite radio this year. This will be a marginal improvement as compared to last year's 10.7 million. Presently, 60 million cars have factory installed satellite radio and the firm expects this figure to climb to 110 million in the next five years.

Apart from new cars, Sirius is also targeting the used car segment in which it gives a 90-day free trial. In fact, Sirius expects sales of previously-owned vehicles fitted with satellite radio to exceed that of new cars fitted with their radio. So, the company has taken various initiatives to increase its sales, one of them being the service lane initiative. If a customer has not renewed his/her subscription, then Sirius offers them free trials to retain them.

Sirius offers these trials with the help of a network of dealers. Currently, it has 2,500 dealers in its network. In 2013, it offered 13 million trials, out of which 34% where converted into subscribers, including both new and used cars. Sirius has also received good response from OEMs (Original Equipment Manufacturers) in Asian and European markets.

Competitive climate

The turnaround story of Sirius XM is very impressive. Back in 2008, the company was posting huge losses of over $8 billion, but it has come a long way and has shown consistency. As it is evident from the table below, Sirius has improved its metrics steadily; however, the company may struggle to sustain this run as the market becomes more competitive.

Criteria

3- Year Growth

Net Income

374%

Free Cash Flow

190%

Earnings Per Share

150%

Revenue

32%

According to Reuters, Spotify is set for an IPO which could value the company at $8 billion. It reportedly hired a U.S. financial reporting expert that is required to prepare the company for SEC filing standards. The IPO will give Spotify financial backing to grow its business and this is bad news for Sirius as it will help Spotify steal its market share, as well as investors.

In addition, Apple's first foray into the car entertainment market will further hurt Sirius XM. The company is already struggling to increase subscribers and the launch of Apple's CarPlay could prove to be a fatal blow. CarPlay will allow iPhone users to make phone calls, check voice mail, and access the iPhone's flash memory for while driving by simply pressing a button. iPhone users will now be able to use this feature to stream music while driving and this can potentially hurt Sirius XM.

The CarPlay will be made available for Mercedes-Benz, Volvo (OTC:VOLAF), and Ferrari drivers initially, and will soon spread to other big brands. This will also give drivers access to Apple's iHeartRadio service that pulls music programming from roughly 800 clear channel radios. Of course, this feature is only available for iPhone users, but given that it commands a massive market share in the U.S., this could hurt Sirius XM going forward.

Conclusion

Sirius XM is targeting every possible customer by striking deals with auto makers, and is also wooing used car owners. It has tie ups with various auto service providers to give free trials to customers in a bid to increase its base. However, at a trailing P/E ratio of 58, Sirius is very expensive. But since solid earnings growth is expected in the future, the forward P/E is very low at 25. Sirius' earnings are expected to grow at a 22% CAGR over the next five years, so it could make a good long-term bet.

However, investors should keep a close watch on the competition as the company plies its trade in a highly-competitive industry. The advent of Apple's CarPlay and the expected IPO of Spotify are credible threats for Sirius and these need to be watched.

Source: Will Apple And Spotify Halt Sirius XM's Revival?