By Brandon Matthews
As I was reviewing 2010, and looking to make some forecasts for Sirius XM Radio (NASDAQ: SIRI) in 2011, I ran into a brick wall while looking at subscriber growth estimates. Years ago, attention was focused on subscriber growth. It had to be. Earnings, free cash flow and EBITDA were non-existent on Sirius XM's balance sheet. Since the merger, Sirius XM has become a cash flow growth story and moved away from being a subscription growth story.
This means that Sirius XM reached a point where subscriber growth became insignificant, as the company demonstrated its profitability and viability based on its current subscriber base alone. Additional subscribers are a well-received bonus, and Sirius XM is adding about 1 million new subscribers a year. This had led to complacency, as analysts use these results in forecasting 2011 growth and beyond. In 2010, Sirius XM handily beat even the most bullish analyst forecasts when it reported its 20 millionth subscriber.
To put that number in perspective, one analyst report from August of this year estimated Sirius XM to end the current year with 19,337,000 subscribers, and had a 2011 target of 21,150,000. Sirius XM per its own guidance of 20.1 million will nearly meet that former 2011 target. Given this, it can be said that Sirius XM's subscriber base is accelerating. Rumors are now mounting that since the re-signing of Howard Stern, the Sirius call center has been flooded with phone calls by people seeking to re-activate radios that had gone silent. This might just be the beginning of a subscriber growth spurt that I think will take place in the first quarter of 2011.
There are two events that took place in December which by and large were overlooked by the masses. As you know by now, that which is overlooked creates opportunity, because by the time you read about it in The Wall Street Journal or hear about it on CNBC, it's too late to make any money. Years ago, Sirius' largest share price increases resulted from unexpected increases in subscribers, and realistically the same argument can be made for 2010 as a whole. I expect just such a subscriber growth spurt to occur in the first quarter of 2011, which means that at current levels, Sirius XM shares are on sale.
The first catalyst for a subscriber growth spurt can be found with Dr. Laura, whose show will launch exclusively on Sirius XM next week. Dr. Laura brings a 30-year following and millions of potential listeners to the table. Her commercial radio program decided to pull the plug on her early as she used her microphone to promote her new show on Satellite Radio. While her show has been aired on Sirius XM since 2005, its non-exclusive nature didn't result in a subscriber growth spurt.
Her message however, was received loud and clear by her diehard fans whom no doubt sought Sirius XM radios as holiday gifts, most of which will be activated in the first quarter of 2011, much as we witnessed with the addition of Howard Stern years ago.
Which brings me to my second catalyst. Howard Stern is now available on mobile devices through the Sirius XM app for Apple's (AAPL) iPhones, Google's (GOOG) Droids and RIM's (RIMM) Blackberries. One only has to look at the comments under the Sirius XM app on iTunes to understand how significant this is. Stern has managed to bring between 1 and 2 million of his 12 million listeners to Satellite Radio.
When Stern joined Sirius in 2004, Satellite Radio was not an easy thing for many people. It had not been broadly installed in new vehicles yet and was completely unavailable in older cars. A barrier to entry formed as listeners were forced to go out and purchase a special receiver, and wire it correctly. The end result was bulky radio and unattractive wires draped across the dash. The suction cups used for mounting would often give way, and the radio would fall if the glass was not cleaned first. Satellite coverage at the time too, was wanting as the terrestrial repeater network was still being built out, making many office buildings and heavily treed areas void of any satellite radio signals. Many people simply gave up.
With the hardware barrier to entry removed, the probabilities suggest that Sirius XM will see an increase in subscribers attributable to Stern in the first quarter. The actual numbers won't be revealed until sometime in May of 2011. While I admit this is a ways off, remember that markets are forward looking. Sirius XM shares will likely run up well before those results are revealed. Subscriber additions may reach in excess of the one million mark in a single quarter, and even that may be conservative.
Once these numbers come out, the price will have moved already. The analysts will be tripping over themselves to play catch up with strong buy ratings and price target increases. No one has factored this in, and no one will until the numbers are revealed in five months. My investing philosophy is to get in front of the next move....not wait for it and chase it. Now that I've written this, every broker in the country will be using this article as a pitch to promote SIRI. It almost makes we want to go back to Wall Street just to pitch it myself.
Disclosure: I am long SIRI.