Growing New Vehicle Sales And A Push Into Used Cars Will Drive Sirius XM's Subscriber Growth
Sirius XM ( SIRI ) is the only satellite radio provider in the U.S. with over 25 million subscribers. The total number of subscribers for the company jumped significantly in 2008 with the merger of Sirius and XM. Since then, the figure has increased consistently, amounting to 25.6 million at the end of 2013. The growth was driven by increased vehicle sales and Sirius XM's increased penetration among new vehicles. Going forward, we expect this growth to continue as new vehicle sales increase with improving an economic environment and the satellite radio provider aggressively pushes into the used car market. However, the emergence of HD radio and 4G mobile Internet networks is likely to pose some risk to Sirius XM.
We currently project Sirius XM's subscriber base to increase from 25.6 million in 2013 to 26.9 million this year. The company added more than 700,000 subscribers during the first six months of 2014 and it is well on its way to add another 600,000 by the year end. After 2014, we expect the satellite radio provider's subscriber base to increase consistently and reach 37.8 million in the next five to six years. However, if the figure reaches 42 million instead, with increased penetration in the used car space and robust growth in new car sales, there can be about 10% upside to our price estimate. On the contrary, if the total number of subscribers for Sirius XM increases to just 34 million, due to fierce competition from free music streaming services, there can be about 10% downside to our price estimate for the satellite radio provider.
Our current price estimate for the company stands at $3.49 , which is just below the current market price.
Increased New Vehicle Sales will have a Moderate Positive Impact
The gradually improving U.S. economy is likely to drive growth in the region's automotive industry. This is already evident as car sales in 2013 posted a healthy growth over 2012, thus enabling Sirius XM to register strong subscriber gains. Six out of eight top automotive manufactures in the U.S. posted high-single-digit growth in their volume sales as low mortgage rates encouraged buyers to spend more on automobiles. Overall, new vehicle sales stood at 15.6 million in 2013, up 7.6% as compared to 2012, and are expected to reach 16.4 million (a 5% increase) by the end of 2014. For the first eight months of the year, U.S. car sales have increased by 5% year over year, which indicates that the market is growing at the expected rate. In the long run, we expect new car sales to continue to improve, albeit at a slower pace, as improving economic environment drives consumer affordability.
Historically, Sirius XM's subscriber growth through the new car market has come from growing new car sales and improving penetration rate. However, now with stabilizing penetration rate, the satellite radio provider's growth through this channel won't be as compelling as before. Nevertheless, the company will still be able to grow its subscriber base at a moderate pace driven by an increase in new car sales.
Every year, Sirius XM pays a substantial sum to its OEM partners to keep its radios flowing into the new car market, at a 65%-70% penetration rate. The company has long term contacts with several major automakers including General Motors ( GM ), Ford ( F ), Toyota ( TM ), Kia, Bentley, BMW, Volkswagen, Nissan, Hyundai and Mitsubishi. It is worth noting that in 2013, Ford's volume sales increased by 11% and General Motors' and Toyota's sales improved by over 7%. While their growth hasn't been as robust so far in 2014, we believe that Sirius XM is targeting the right automakers to push its radio services in the new car market.
Push in Used Car Market will have a Stronger Impact
While we expect continued growth in Sirius XM's subscriber base going forward, it is likely to be slow due to stagnating penetration rate in the new car market. However, the satellite radio company can compensate for this by targeting the used car space. Sirius XM estimates that there are 60 million satellite enabled vehicles in the U.S. and its penetration rate in the used car space is low at 30%. We believe that the satellite radio provider shouldn't have too much trouble in activating idle satellite radio sets in used cars since it is the only satellite radio provider in the country.
The company has been targeting used car buyers with its two-week free subscription and low introductory prices. A few years back, it introduced its "direct-to-dealer pre-owned program" authorizing dealers to offer Sirius XM subscription to used car buyers. Back in 2010, only 100 dealers were included in this program, but it increased rapidly to 13,000 dealers at the end of Q2 2014. In August last year, the company launched its Service Lane program that offers two-month free subscription to car owners who brought their cars for servicing at particular stations. Earlier this year, Sirius XM announced that dealers who use Reynolds ERA DMS via Reynolds Certified Interface Program will be able to participate in pre-owned and Service Lane programs.
With its aggressive foray in the used car space, Sirius XM should have no trouble in sustaining its subscriber growth amid rising competition from free music streaming services.
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