Will Apple Take Down Sirius XM?

| About: Sirius XM (SIRI)


Sirius XM is struggling this year, despite posting a good performance in the recent quarter.

Sirius is seeing good growth in subscribers, but profits aren't growing at the same rate.

Competition from Apple's iTunes Radio and CarPlay can hurt Sirius to a great extent.

Sirius XM (NASDAQ:SIRI) has continued struggling in 2014, as its shares are down more than 5%. Although the company's first-quarter results reported in April were strong, the stock price hasn't improved. It looks like competition from Apple (NASDAQ:AAPL) and other players such as Spotify has continued to weigh on Sirius' stock price. Moreover, Sirius trades at a really expensive valuation, which might be another reason why the stock is not finding momentum as its earnings are declining.

For example, in the first quarter, Sirius' adjusted net income dropped to $121 million from $123.6 million in the same period last year, excluding the effect of a share repurchase agreement with Liberty Media.

Things look impressive here

However, the good part was that Sirius XM grew net subscribers by 267,000 in the first quarter, to an all-time high of 25.8 million. Self-pay subscribers grew by 173,000 in the first quarter, also to an all-time high of 21.3 million, up 7% year-over-year. This first-quarter subscriber growth was above its internal forecast for the quarter, and is consistent with its full-year guidance.

Management remains confident about achieving its full-year subscriber growth target of approximately 1.25 million. Moreover, it targets to grow its paid subscriber base to a total of 30 million by the end of the year.

The company's solid subscriber growth and high contribution margins led to strong growth in adjusted EBTIDA and free cash flow, in line with Sirius' expectations. Looking ahead, the company believes that it has great opportunity to grow its business as, according to management, its radios today are only in about 26% of the cars on the road. Also, car makers are embracing Sirius XM at a good pace. Its penetration rate in the first quarter was about 70%, up from 67% in last year's first quarter.

Sirius XM projects around 11 million trials in the new car market this year, based on its penetration forecast and this year's expected auto sales of around 16.2 million. Total enabled vehicles on the road with a factory-installed satellite radio were approximately 62 million at the end of the first quarter, and this is expected to double in the next five years to approximately 120 million, giving Sirius an opportunity to both grow its new car base and drive its second-owner business as well.

The second-owner market continues to yield significant and growing results for Sirius. It has a network of 12,000 dealers to sell satellite radio. Over 3,000 of these dealers are also enrolled in its service line initiative, which gives it the opportunity to offer trials to dealers' customers who are getting their vehicles serviced at participating locations. Also, Sirius XM is on track to grow self-pay additions in the pre-owned car market from approximately 1.5 million last year to close to 2 million this year.

Apple is a big threat

However, Sirius will face stiff competition from Apple, which is aggressively focusing on CarPlay and iTunes Radio. Apple has been aggressively adding more channels to iTunes Radio. As reported by 9to5Mac:

Hot on the heels of the announcement that Apple had acquired the Beats Music streaming service for $3 billion to help bolster its own struggling competitor, 9to5Mac has learned that Apple is introducing a new ESPN station for iTunes Radio. The station will include original ESPN programs like SportsCenter All Night, SVP and Russillo, The Herd, and Mike & Mike.

The ESPN station will also stream the World Cup, making it the first live sporting event to be streamed live through iTunes Radio. According to a 9to5Mac source, forty-two new local NPR stations will also be going live on Apple's streaming service, including New York Public Radio, WAMU in Washington, D.C., San Francisco's KQED, and more, with additional stations already planned.

Thus, as Apple expands the portfolio of stations on iTunes Radio, Sirius might be in trouble. Also, Apple's CarPlay is another big threat for Sirius. CarPlay will enable iPhone users to make phone calls, check voice mail, and access the iPhone's flash memory while driving by just pressing a button. Also, iPhone users will be able to use this feature to stream music while driving.

CarPlay will be available for Mercedes-Benz, Volvo (OTC:VOLAF), and Ferrari customers at first, and will spread to other brands gradually. This will also give drivers access to Apple's iHeartRadio service that pulls music programming from around 800 clear channel radios. Although this feature will only be available for iPhone customers, but considering that the iPhone commands a massive market share in the U.S., it could hurt Sirius XM going forward.

The bottom line

Finally, Sirius' expensive valuation is another reason to avoid the stock. Its trailing P/E ratio of 59 is quite expensive, while a PEG ratio of 1.87 represents slower growth. Considering the competition from Apple, I think it is wise to stay away from Sirius XM, as its performance might falter going forward.

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.