Satellite radio provider Sirius XM (NASDAQ:SIRI) has put in a weak performance this year, dropping around 3%. However, Sirius will have a chance to stage a comeback when it reports its second-quarter earnings that are due this week. Under stiff competition from Apple (NASDAQ:AAPL) and other players, Sirius will need to come out with solid results and a strong outlook. Let's see if the company is capable of delivering.
Sirius XM's earnings are expected at $0.02 per share, flat with the year ago quarter. The average revenue for the quarter is estimated to be $1.02 billion, way better than the year ago quarter's $940.11 million.
Sirius XM's gross margin and operating income have been severely affected by its rising costs. Besides, the company is also suffering tough competition from Apple, Google (NASDAQ:GOOG) (NASDAQ:GOOGL), and Amazon (NASDAQ:AMZN), which are entering the music streaming market. With companies like Spotify and Pandora (NYSE:P) already present in music streaming for years, Google, Amazon and Apple are just initiating investments in this segment. All of this might lead to a decline in Sirius' subscriber base, as well as revenue growth.
Competition is strong
Pandora has always been the best in the business, but its stock is too expensive to invest in. The company is not profitable, but it still has a market cap of $5 billion. Hence, it's not much of a threat.
Apple serves as the first significant competition that Sirius has faced in the automobile industry. Apple's recently launched CarPlay allows drivers to use their iPhone apps for in-car infotainment, which features Apple's iOS operating system in vehicles that includes phone, maps, messages, and music. CarPlay's iTunes Radio already has a listener base of 40 million, which will help in further increasing its listeners. Unlike Sirius, users need not subscribe to CarPlay to access iTunes Radio. CarPlay is already included in automobiles like Ferrari, Mercedes-Benz, Volvo, Honda, and Hyundai models, and will soon be installed in BMW, GM, etc.
Apple now has a music index of 26 million songs. With its new policy, it will pay more to artists than any other player in the market. It is believed that if iTunes Radio becomes a separate app, iPhone users might choose to forgo their Sirius XM radio service. Also, Apple acquired Beats Electronics for $3 billion, which will help convince headphone buyers to make Beats Music their default music streaming choice.
Google and Amazon join the fray
Also, Google recently acquired streaming service Songza for $15 million, which allows Google to be a strong player in curated music. This acquisition will enhance Google's streaming music efforts.
Google's Android Auto service is another threat for Sirius. This service can be personalized according to consumers' needs, and allows the use of apps like Spotify, iHeartRadio, and Pandora to meet the listening as well as other needs of users such as communication, maps, and search. Google also plans to launch auto-infotainment systems by next year.
Amazon.com is already a leader in the music industry with ample music sales, and it recently launched its own music streaming service. It announced a new feature for its Amazon Prime membership called Prime Music, which has got more than 1 million songs from top artists on its platform.
Prime Music allows users to create their own library and playlists, listen to the company's pre-set playlists, and receive song recommendations, all with no extra charge and no advertisements. Although Android Auto or CarPlay are not going to generate huge money for Google or Apple, but they are very much capable of taking away Sirius' customers.
Also, Sirius sanctioned another buyback worth $2 billion a few weeks ago. This means that the company has spent near $6 billion on buybacks since December 2012. You may think that buybacks benefit investors, but I think it was a bad decision. The increasing competition will definitely hurt Sirius XM, which is why I think the company should have invested that money to generate new revenue streams. The company could've used at least half of the money spent on buybacks to fight off competition and fortify its position in the market. Thus, I think buybacks aren't that helpful in the long run.
Valuation is too expensive
Sirius historically has had a high P/E ratio. The company is trading at 61x trailing earnings, which is way more than the industry average of 13, but the company's prospects are not enough to justify this valuation. The increasing competition will definitely slow down Sirius' growth, which is why investors should stay clear of the stock.
Thus, a rich valuation and growing threat from established players such as Apple, Amazon, and Google can take down Sirius going forward. As such, the stock is best avoided as a turnaround looks unlikely.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.