Can Pandora's Box Concern Sirius XM?

| About: Sirius XM (SIRI)
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Sirius XM Radio (NASDAQ:SIRI) has already accrued returns of 8% in 2013, on the back of another 60% rise in 2012, and is expected to yield another 20% post the earnings announcement.

Pandora Media (NYSE:P) is fast becoming a serious challenger for the market, dominating Sirius, with the increased usage of internet as a music streaming option. Can Pandora halt the growth of Sirius or will Sirius continue to grow is the question on the minds of many investors.

Growth driven by auto

Sirius satellite radios are present in almost 70% of the cars sold in the US, thereby tying its fortunes to the health of the US Auto industry. The fact that the auto industry is their bread and butter was further evidenced from the fact that High level executives of the company visited the Las Vegas Consumer electronics show to try and woo automakers.

On the downside, Sirius has relied too heavily on the auto market. About 50 million cars in the US are fitted with the satellite radios, but only around 45% of them actually subscribe to the service.

Sirius has also announced that it has struck a deal with Toyota which makes Sirius' service a standard fitment across almost all models of Toyota cars. This could prove to be a huge boost for Sirius, even if half the customers subscribe to its service, as is the prevalent case.

Competition from Pandora

The battle for controlling the music streaming market is happening on two fronts. One is on automobiles, where Sirius has been a clear winner, and is actively taking advantage of its dominating position.

The other is on mobile devices, where Pandora has the upper hand with well over 60 million active users. Sirius has also launched its own apps in iOS, Android and Blackberry platforms, but is yet to gain an active user base in the mobile ecosystem.

This suggests that both the companies are on different courses, with each trying to take a chunk out of the other's business.

Subscription driven rather than advertisement driven

Sirius generates its revenues on a subscription based business model. This means the customer pays a fixed subscription price as the access fee for a limited duration. Pandora, on the other hand, generates most of its revenues from advertisements, and only a small share from its subscriptions. Of the total 60 million users of Pandora, only 1 million actually subscribe to their premium services.

This is another shot in the arm for Sirius as subscription model generates constant revenues, whereas advertisement based model exposes Pandora to a plethora of uncertainties.

Pre-earning release And New Guidance

Sirius announced it expects to meet all its guidance for 2012, if not exceed some parameters. Consensus estimates that Sirius is expected to report revenue of $3.4 billion and EBITDA of $952 million for 2012.

Sirius has given it guidance for 2013 and according to that, it expects revenue of over $3.7 billion, adjusted EBITDA of over $1.1 billion, while the consensus estimates put the figures at revenues of $3.8 billion and EBITDA of $1.2 billion for 2013.

As the subscription based business model assures a constant stream of revenues, and since the number of customers is also growing steadily, it lends that much more credibility to the guidance given by the company.

Key Highlights

  • Subscribers grew to an all-time high, adding up to nearly 21.9 million by the end of 2011. Another 2 million were added in 2012, and is forecasted to add 1.8 million in 2013
  • Over the past 2 years free cash flow essentially doubled to $900 million
  • Revenue was guided to $3.4 billion for 2012 and 2011 was $3.0 billion
  • Stock up 60% in 2012, and has added another 8% in 2013 already

Attractive proposition

Sirius has recently announced that it is being taken over by Liberty Media (LMCA), which is also the largest shareholder in Sirius currently. Liberty has also received permission from the Federal Communication Commission for the takeover, and is expected to complete the transaction in two months.


Considering its dominant position, recent deal with Toyota, results exceeding expectations, and the recent takeover by Liberty, it can be clearly seen that the stock is headed in only one direction. Out of the 17 analysts following the stock, 12 have rated the stock as either BUY or OUTPERFORM. It is one of those stocks that investors can look forward to soar even higher, this earning season.

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.