Sirius XM: Is Nobody Else Excited About Agero?

| About: Sirius XM (SIRI)
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It's shocking, really. Sirius XM (NASDAQ:SIRI) announces that it will acquire Agero's connected vehicle unit for the sum of $530 million sometime in Q4 of this year, and not much is made of it other than some re-hashing of the news and one guy's concern that this purchase might now limit the possibility of future buybacks.

Is anyone paying attention? Hello?

This is something to be excited about as a Sirius XM investor, and something to seriously consider if you are not currently invested in Sirius XM. Do we need to see the financials and all the minute little details of the transaction here to understand that this could be a very big deal? Absolutely not, and while I often roll my eyes in frustration when people ramble on saying X company should buy Y company playing armchair CEO from the land of make believe, this is far different. This is a real acquisition that can, and in my opinion will, take Sirius XM to the next level in the coming years.

A brief history

First, a short bit of history for those new to the story here.

Sirius XM, in 2009, was bordering on bankruptcy. The share price had fallen to pennies, hitting $0.05 per share one day, and it seemed as if the company was about to go under. A last minute savior, Liberty Media (LMCA), came in and bailed the company out with a short-term loan in return for 40% of the company. From that point forward Sirius XM has effectively been under the control of Liberty, and the company went quarter after quarter slowly improving the balance sheet, adding subscribers and forming a strong base of installed radios in cars. Debt was paid down, costs were brought down, and revenue per subscriber was brought up.

This slowly brought the lows from that low of $0.05 to a much higher low of $1.85 in July 2012. It was then that Liberty closed on a forward contract for over 300 million shares, solidifying notions that it would go to a full controlling stake in Sirius XM. Since that time, Sirius XM has appreciated from $1.85 to recent closing prices of $3.70, an exact double from roughly 1 year ago.

But that's looking back... all eyes should be looking forward.

The connected car was a long-term threat

So here we sit, invested in a satellite radio company constantly barraged by ideas that the connected car will destroy Sirius XM in the future. Telematics, in dash computers and applications running Pandora (NYSE:P), Spotify and iHeart radio. How would Sirius XM compete with what is set to be a rapid evolution in vehicle dashboards going forward? With one-way delivered satellite radio? The progression of technology over time threatened to push that into obsolescence. Granted, that obsolescence may take 10 years or more to play out, but the threat has been a real and present longer term danger.

Danger, that is, if you truly believed Sirius XM was due to sit idle and foolishly drift along with those running the company thinking that satellite radio was the wave of the future. Obviously, that's not the case, and in my opinion the genie has been let out of the bottle since Liberty has gone to control of Sirius XM. Those pondering that Liberty Media was interested in a quick "smash and grab" on Sirius XM to spin it out for cash are probably going to find their trepidation misplaced as I believe Liberty has grander plans for Sirius XM, and that begins, not ends, with the Agero purchase.

Consider the future

Take a look at the dash board of a car from 2003. Ten years ago, in most cars, you likely had your AM/FM radio, CD player, and whatever mechanical gauges and dials were necessary. No Bluetooth, no iPod jack, and probably no auxiliary input. Unless you are choosing a pricey luxury car or expensive optional systems from that time period, you were very "low tech" and low on options. If you were lucky, you had Sirius XM. Below is the dashboard of a typical 2004 Honda Civic Hybrid.

Fast forward to today. Take a run down to your local Honda dealer and jump in a Civic. The picture below is from a 2012 model. You'll see the evolution, and this is the dash board of what is arguably a car for the budget conscious. Digital gauges, navigation (optional, but more reasonable cost vs. 2003) / computer, satellite radio, and a digital read out for driver information.

More money to spend? Want a glimpse toward the future? Even this may look dated in 2023, but consider Tesla's (NASDAQ:TSLA) Model S and the image of its dashboard below. It should be clear - computers, infotainment and connectivity are quickly overloading the dashboard.

Where's the AM/FM dial?

And that gets to my point. Investors should always be considering the future and where their investments may be in 5 or 10 years, even if the future is cloudy. The general evolutionary path of technology should be quite obvious within that time frame, and investors in Sirius XM will want to see the company keeping pace with the future dashboard.

We're not going backwards, no matter how "good" those 8-tracks sounded "back in the day."

It's not only about keeping pace

Slow and steady does not win any races in the long run. And just keeping pace with the pack does not ensure you will be able to pull ahead at the last moment. Sure, it can make things interesting, but slow and steady eventually ends up crossing the line last, even if it is safe and sound and in one piece. The pack at the front has those who placed their bets biting their nails to the bitter end.

That's assuming there is no clear leader. When it comes to the future dashboard, a clear leader appears to be emerging. The rest may be able to soon stop biting their nails and simply accept second and third place. I say "appears" here because nothing is certain, but with Sirius XM's acquisition of Agero's connected vehicle unit it has taken the first steps into the future.

Multiple delivery streams

What will dominate the future? The connected car, or even the connected individual (but that's for another article) will. Sirius XM's acquisition here creates synergy and opens the door for both the connected vehicles unit of Agero and Sirius XM's satellite radio services to work together. The big deal here is that no other company can provide what Sirius XM will be able to provide, and that is 100% coverage across the United States. No holes, no gaps, no worries on all in dash services including radio. Satellite and cell can combine to offer the best of both worlds, and at the very least satellite should be capable of filling the gaps where two-way cellular is not available.

Customizable radio? Sure, no problem.

But it's not just about telematics, and it's not just about satellite radio.

It's about the whole package

Sit down in your driver's seat, shut the door. There's your package.

Forget your home computer, or what you can do while pecking at the screen of your smartphone. Look at your dashboard, and this is where Sirius XM will thrive.

Simply stated? If you enjoy Sirius XM, you are probably a subscriber. If you enjoy Agero's suite of in vehicle's services, you are probably a subscriber there as well. But you might currently only have one or the other. What if you could get everything together for a nominal price increase in order to tie it all in? Let's say, $20 a month instead of $15. Make the decision easier? Sure it does.

Savings through bundles can and will bring in customers who would have not bought both services previously. Such savings can also bring in customers who would have not bought either service previously. Likewise, such savings can retain customers who may have considered canceling either service alone.

It's a big deal, and the future dashboard's "monthly fee" may move from a "want" to a "need," much like cable television has become for many individuals. One company that can provide everything, and especially one company which can provide more than any other collection of services cobbled together under multiple subscriptions by the customer, will win, big time.

This is where I see Sirius XM positioning itself. Infotainment, safety and 100% coverage for everything all under one umbrella for "one low monthly fee." 100 million users at $20 or $25 a month? Sound far fetched? Let's just say that time well tell how this all plays out, but the possibilities are exciting and very reasonable to consider.

It's exciting

The connected car, once a long-term threat to Sirius XM, now appears to be a long-term asset. I can't be alone in thinking that this is a big deal, and it appears that this is going virtually unnoticed by the street. This may afford opportunity for investors to get in before the cat is out of the bag, and before the leader of the pack makes itself clearly known.

Consider the possibilities. This was a very smart move by management. Right now my bets are on Sirius XM.

Disclosure: I am long SIRI. 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.

Additional disclosure: I am long SIRI January 2014 calls from strikes $2 to $3.5.