Is Apple About To Crush Sirius XM?

Mar.28.14 | About: Sirius XM (SIRI)

Summary

Sirius XM’s market might come under severe pressure as Apple diversifies iTunes Radio.

The advent of Apple’s CarPlay is another big concern for Sirius.

Sirius XM’s high valuation and debt are red flags.

Sirius XM (NASDAQ:SIRI) has been in the news of late after Liberty Media (NASDAQ:LMCA) dropped its bid to take over the satellite radio provider. This hasn't affected Sirius' stock price in a major way, since Liberty already owns 53% of Sirius and wanted to buy it out completely for $3.68 a share, as Sirius was already trading at identical levels. However, there are some pressing concerns for Sirius at the moment, as Apple (NASDAQ:AAPL) is encroaching into its territory quite aggressively with its iTunes Radio.

Apple makes a big move

Recently, it was revealed that National Public Radio will be included as the first news radio station on Apple's iTunes Radio. According to Peter Kafka of Re/Code -

When iTunes Radio launched last fall, the service was designed for music fans (and music labels). Now it is branching out: National Public Radio is adding the first news station to Apple's audio streaming service, with more on the way.

NPR's station, which should be live today, will offer a free stream, 24 hours a day, which mixes live news with segments from pre-recorded shows like "All Things Considered" and "The Diane Rehm Show." NPR officials say that within weeks, some of the broadcaster's local stations should begin offering their own stations, with a similar mix of live and taped news.

Hence, Apple is diversifying its radio service to more than just music by offering NPR on iTunes Radio, and this is a sign of more dangerous things to come for Sirius. As The Street points out, certain local stations would also want to run their programs on Apple's iTunes radio, and this would go a long way in attracting more users to its service.

CarPlay: Another point of concern

In addition, Apple's launch of its CarPlay service is another reason why Sirius XM investors should be apprehensive about the company's long-term prospects. CarPlay is a rebranded version of iOS for automobiles and it could change the face of in-car infotainment. The likes of Ferrari, Mercedes-Benz and Volvo (OTCPK:VOLVY) have already started shipping CarPlay-enabled cars. Going forward, Apple is slated to include Honda (NYSE:HMC), Hyundai (OTC:HYMLF), Jaguar, BMW (OTCPK:BAMXY), Chevrolet, Ford (NYSE:F), Kia (OTC:KIMTF), Land Rover, Mitsubishi (OTCPK:MMTOF), Nissan (OTCPK:NSANY), Peugeot-Citroën (OTCPK:PEUGY), Subaru, Suzuki (OTCPK:SZKMY), and Toyota (NYSE:TM). Hence, Apple's presence across all these manufacturers is a serious threat for Sirius XM.

However, Sirius XM's performance has been decent of late, with the company adding 1.66 million subscribers in 2013, and now has over 25.5 million subscribers. With new car sales expected to hit 16 million units this year in the U.S., Sirius XM investors would be optimistic regarding the company's prospects. However, the advent of CarPlay and Apple's ties with a slew of major car makers would definitely be a major concern for Sirius.

Sirius's penetration rate at major automakers in Q4 was 71%, the highest in the history of the company. This year, it is expected to be around 70%. Hence, while Sirius might go great lengths to explain how new cars are being launched with satellite radios in the current year, it doesn't expect a major boost in its penetration rate.

Last year, Sirius had announced a higher penetration at Toyota and Honda. Also, it recently extended its agreement with Nissan through 2018, and Nissan will now be significantly expanding satellite radio penetration across its entire model lineup. However, as mentioned earlier, all these manufacturers will also be offering Apple's CarPlay going forward, so Sirius might not be able to achieve its ambitions.

New cars sold with a satellite radio are estimated at 11 million this year, up from 10.7 million last year and 9.6 million in 2012. There are now approximately 60 million vehicles on the road today with a factory-installed satellite radio, and this number is expected to nearly double in the next five years as satellite enabled vehicles exceed 110 million. Again, this looks like a solid endorsement of Sirius' prospects, but since Apple is offering a more complete solution through CarPlay, which would virtually put an iPhone into cars, customers might opt for it since it is offering more than just radio.

Also, considering the huge number of iPhone users in the U.S., it won't be surprising if CarPlay gains solid traction going forward.

Conclusion

Moreover, Sirius XM is tremendously overvalued at a trailing P/E of 53, which is pretty high considering that its earnings declined 58% in the previous quarter while revenue grew just 12%. Also, the company has a debt of $3.6 billion while it has just $138 million in cash. Investors should seriously think of exiting this overvalued stock as it is under attack from Apple and could lose its wheels in the long run.

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.