A commonly accepted measure of any company’s success includes its market penetration and/or growth rates. Eventually, every product or service reaches a peak in both areas. Stock markets offer investors an opportunity to take advantage of growing companies versus those who may have peaked and fizzled out. In the end, all stocks become pyramid schemes in a sense which makes it imperative to know the difference, in order to know when to get out of any given stock.
With this in mind, let’s take a look at how this theory applies to Sirius XM Radio. Early estimates for the Satellite Radio provider estimated its potential U.S. market at 300 million potential subscribers. This number was attained by calculating: cars, trucks, boats, homes, and businesses. In reality, no one ever expected to see 300 million subscribers, it was merely a benchmark that the company’s progress would be measured against.
In its early years, market penetration rates were exceedingly high. As Satellite Radio’s popularity grew, its stock price rose in unison. In recent years, that market penetration rate has shown signs of slowing down, and the stock has fallen with that data. It can now be calculated that Sirius XM Radio, with nearly 20 million U.S. subscribers, has thus far achieved a market penetration rate of 15%. Keep in mind that the percentage is only a benchmark of future success.
As the company has seemingly peaked as far as its growth rate is concerned, it stands to reason that the penetration rate is also nearing its peak as far as percentages go. Even if the company were to grow to 50% market penetration, it would take decades to achieve this at its current rate of growth, and thus the stock price is stuck.
There are several things a company can then do to increase revenues such as adding new products and services that will appeal to its customer base, such as Sirius XM has recently done by adding its “best of” and other programming packages. Another way is in cost reductions, which Sirius XM has achieved during the last several quarters. Unfortunately, you can only extrapolate so much from your customers and cost cutting eventually leads to a decline in performance, which opens the doors to competitors.
Early market estimates for Satellite Radio did not include the potential for subscribers outside of the United States. They also did not include the global possibilities given the Internet or wireless mobile devices. That has changed:
Enter Apple (NASDAQ:AAPL).
With the announcement of the introduction of the Sirius XM iPhone application, the potential market for Sirius XM’s content has just risen astronomically. Not only is Sirius XM Radio content now available around the world on an iPhone, it is now being streamed to laptop and desktop computers worldwide. Belkin, a long time Satellite Radio accessory partner, is about to introduce a device that will allow any iPhone to be used to play audio through ANY existing car stereo. We all should consider what this means for Sirius XM Radio content. The Sirius XM Radio application would then be transmittable to existing car stereos without the cost of a full satellite radio auto package.
Grace radio offers a worldwide home solution that allows Apple devices to be integrated for use through home audio systems. The possibilities are now in fact endless for Sirius XM Radio to grow. It is now up to the company to make the most out of the potential that has now been created. The Street will undoubtedly want to get a sense of what the new growth rate will be, and that data may not be forthcoming until Q3 is completed, which offers those with vision an opportunity of a lifetime. There are more potential consumers of the iPhone in China alone than the number of iPhones that exist in the entire world, a number exceeded only by the number of automobiles globally. Now factor in 15% of that.
Position: Long SIRI