Sirius XM: Buy Or Sell - The Dilemma Explained

| About: Sirius XM (SIRI)

Richard Saintvilus of, who's also a fellow contributor here on Seeking Alpha, wrote a timely piece Wednesday morning, just before market open, in which he asked, "how high can Sirius XM (NASDAQ:SIRI) Fly?" In that article, Richard said the following:

Given Sirius' growth momentum, it wouldn't surprise me to see the stock break $3.30 today. But I do wonder, though, how long can Sirius' strong performance maintain this level?

Surely enough, the stock reached as high as $3.33 shortly after the start of trading and then took off to $3.39. The question is, can this continue, especially since this one is known to feel the summer lull blues. Besides, one has to imagine that there will be profit-taking with each new high. That said, whether you've been holding this stock for a while or you are thinking about buying, don't allow any sudden decrease deter you from the long-term trend. As the headline here suggests, there is plenty of value still left.

Even though Sirius has already gained more than 16% year-to-date, I believe the odds favor a push to $3.50 and possibly $4.00 before the third-quarter conference call. Before you disagree, consider this, not only is Sirius buying back shares in large quantities, as fellow Seeking Alpha contributor Stephen Faulkner has been explaining to us, but the company's growth trajectory is unlike anything investors have ever seen. But I'm not going to pretend that this is a flawless investment. There are still opportunities for improvement, especially in terms of business profitability. And if Sirius addresses these areas early enough, investors could see $4.00 print by this summer.

Let's go over the numbers The first take-away from this report, given the record 24.4 million total subscribers, is that Sirius' business model is working to "near perfection." The fact that total subscribers increased 9% year over year is no small accomplishment. However, the self-pay subs number of 304,000, which was less than 2% growth, wasn't as exciting as I thought it was going to be. While any growth in the subscription model business should be welcomed, I'm sure you will agree that 2% pales in comparison with the 148% growth that Sirius posted last year at this time. The good news, though, is that Sirius now has a total of 20 million self-paying subscribers, which is a strong 9% year-over-year increase. Likewise, the company continues to rake in the cash, which by the way is fueling the company's stock buyback program. As impressive as is Sirius' subscriber growth, investors should be more impressed with the company's free cash flow growth, which is outgrowing every segment of the business - surging from $15 million in Q1 2012 to $142 million this year.

The dominant cash-flow performance was helped by an improved SAC, or subscriber acquisition costs, which fell slightly year over year. Sirius was able to reduce SAC despite a 16% increase in gross subscriber additions. This is an outstanding example in efficiency as SAC shed $9 to only $51 this quarter. Unfortunately, though, it wasn't all good news. I did notice a sequential decrease in ARPU, which is essentially what contributes to Sirius' margin performance. ARPU, or average revenue per unit, in this case, subscriber, declined from $12.12 in the fourth quarter to $12.05 in Q1. While ARPU is still up more than 2% year over year, the fact that it dropped quarter-over-quarter does not bode well for confidence. Admittedly, it's a small number, but these things matter. And it's certainly something that bears watching for in Q2.

No longer a speculative bet…but

Finally, I think Sirius has arrived to where the company is no longer a spec play - even the bears have to admit this. As careful as I am regarding the decline in ARPU, the fact that the management team continues to lower SAC and G&A expenses, which dropped 6% this quarter, means that the company is aware of the deficits it needs to fix. And it is precisely these improvements that will lift the stock to $4.00 in 2013.

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.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Tagged: , , , Broadcasting - Radio
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here