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Summary

  • Amazon recently launched its Prime Music streaming service, which is a good value proposition and could hurt Sirius XM's prospects.
  • Apple's CarPlay is already a big threat for Sirius.
  • Sirius has a weak balance sheet and it is too expensive, making it a stock to stay away from.

In my earnings preview, I had stated that satellite radio services provider Sirius XM (NASDAQ:SIRI) isn't a good buy due to competition from Apple (NASDAQ:AAPL). Although Sirius did post some good earnings numbers, still its growth wasn't enough to justify a trailing P/E ratio of 60. Sirius posted revenue growth of just 11%, as net self-pay subscribers grew 7% to 21.3 million, a record-high as it added 173,000 new net self-pay subscribers that raised the total number of subscribers to 25.8 million. While these numbers might look good to some, investors shouldn't forget that Sirius is about to face greater competition from Amazon.com (NASDAQ:AMZN).

Enter Amazon Prime Music

Amazon is adding a music streaming service to its Prime subscription service. As reported by USA Today:

"On Thursday, after much speculation, the online retailer launched a streaming service called Prime Music, at no additional cost for Prime members who pay $99 a year. Those members will automatically gain access to more than 1 million songs, including what Amazon says are tens of thousands of albums from top acts like Justin Timberlake, Pink, Bruno Mars, Blake Shelton, The Lumineers, Bruce Springsteen, and Madonna.

As part of the new no-cost music benefit, Prime members will be able to listen to hundreds of pre-programmed Prime Playlists that are artist-, genre-, mood- or activity-based. Prime Playlists will typically include 20 to 50 tracks and carry names like Feel Good Country, Playdate with Toddlers, The Heaviest Metal and Hip-Hop for Your Commute."

This will lead to more intense competition in the streaming space. Amazon has entered into licensing deals with Warner Music Group, Sony Music Entertainment, and independent labels. Amazon has pledged to add new songs to Prime Music every month to further increase the song base. The most impressive point about the music streaming service is that Amazon is offering it virtually free for those who are already members of Amazon Prime. In comparison, Sirius charges anywhere between $119 and $200 a year for its own service.

Although Amazon has never stated how many members the Prime service has, reports suggest that it is more than 20 million, which is close to Sirius' 25.8 million user base. Amazon Prime gives users access to unlimited free two-day shipping, along with over 500,000 books to borrow free from the Kindle Owners' Lending Library, and free streaming of more than 40,000 movies and TV episodes through Prime Instant Video. The addition of a music service will attract more customers to the Prime service.

Apple's CarPlay is already a threat

Competition from Amazon is a newly-bred threat for Sirius. However, on the other hand, Apple is already a big threat to the company. Earlier this year, Apple had launched its CarPlay service, which is a rebranded version of iOS for automobiles. As I had stated in my previous article:

"Apple is looking to revolutionize in-car infotainment with this venture. Ferrari, Mercedes-Benz and Volvo (OTCPK:VOLVY) have already started shipping CarPlay-enabled cars. Going forward, Apple is looking to bring 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) on board."

Now, Apple is the dominating smartphone player in the U.S. as 42% of users are on an iPhone. Moreover, iPhone's share has increased from 35% in the prior-year period, which means that the company is still gaining traction. As Apple's CarPlay is compatible with iPhones, an ever-growing user base of the device bodes well for Apple and badly for Sirius XM.

In addition, Apple's iTunes Radio is also gaining traction as the company is adding more stations, while the acquisition of Beats Music will strengthen its position further. As reported on 9to5Mac:

"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."

Hence, since Apple is strengthening its content base, and its CarPlay service is expected to gain steam, Sirius XM's prospects might be in trouble.

Is Sirius' expected growth a pipe dream?

However, Sirius remains positive regarding its prospects. It expects auto sales to increase to 16.2 million units this year, and Sirius expects to tap this market by rolling out around 11 million trials this year.

In addition, Sirius expects to benefit from the second owner car market. Sirius has a network of more than 12,000 dealers, and over 3,000 dealers are engaged in its service line initiative. This allows them to offer trials to dealers' customers who are getting their vehicle serviced at participating locations.

Further, Sirius is planning to convert all its 12,000 dealers to its service line, that should possibly enhance its chances of converting more customers. Besides, Sirius is expected to run more than 4 million trials in the second owner car market this year

A weak valuation and balance sheet

But then, since Apple's CarPlay and Amazon's Prime Music service are in the market, Sirius won't find it easy to grow its revenue as fast as it expects. Also, as mentioned earlier, the company is very expensive at a trailing P/E of 60, and a PEG ratio of 1.91 establishes this point further.

In addition, Sirius' balance sheet is not strong. The company has a debt of $3.45 billion, which is too high considering that it has cash of just $121 million on the balance sheet. Moreover, Sirius' current ratio is also very weak at 0.49.

Conclusion

Sirius is facing potent threats from big players such as Amazon and Apple. In addition, the company has a weak balance sheet and is too expensive at the same time. Hence, investors would be better off staying away from Sirius XM as it doesn't look like a good investment.

Source: Will Apple And Amazon Take Down Sirius XM?