The recently released data for U.S. auto sales has led investors to pay attention to various other sectors associated with it. March 2013 sales of 1.47 million units brought the total quarterly sales figure to 3.7 million units, leading to a 7% growth as compared to last year.
The deal
2013 started off with a deal for the company, with Liberty Media Corp (NASDAQ:LMCA) gaining majority control over Sirius XM Radio Inc (NASDAQ:SIRI) through a purchase of 50 million shares. With this move, Liberty Media Corp (NASDAQ:LMCA) now owns 50.7% of Sirius XM Radio Inc (NASDAQ:SIRI)’s outstanding common stock. It all started in 2009, when Liberty Media acquired its initial 40% stake to save the company from bankruptcy.
Since then, Sirius XM Radio Inc (NASDAQ:SIRI) has successfully transformed its business with solid subscriber growth. This deal should further strengthen Sirius’s position, as Liberty Media is keen on technology upgrades as well as acquisitions. Over the long-term, both companies should see greater financial synergies.
Future growth drivers
Sirius XM Radio Inc (NASDAQ:SIRI) added more than 2 million subscribers in 2012, pushing its overall subscriber base to 23.9 million. This growth was mainly driven by its new vehicle conversion rate, which was around 44% in the fourth quarter of 2012, and is further expected to be in the range of 44%-46% over the next few years. Over the last few years, the company has expanded its partnership with auto-makers and dealers, which duly supported its subscriber growth.
The company aims at doubling its user base in the next five years. Moreover, in the used car segment, Sirius XM Radio Inc (NASDAQ:SIRI) added more than 1 million subscribers in 2012, and is targeting to increase that figure to 1.5 million this year. The used vehicle base is growing at a rapid rate, and will reach around 75 million in the next four years, up from the current level of 35 million. I feel that this segment is another strong opportunity for the company.
Telematics is another significant area of growth for Sirius XM, as the concept of connected cars is being widely accepted. In 2012, the auto-based telematics market generated revenue of around $2 billion, and is further expected to grow at a CAGR of 20% in the future. In 2012, the company entered into a deal with Nissan, where it was selected as a complete provider of telematics solutions to Nissan’s vehicles.
It’s a big opportunity for the company for an additional revenue stream, with Nissan selling around 1 million cars annually. If the company capitalizes on this opportunity well, it will help it secure a dominant position in the automobile segment and also enhance its top-line growth in the long-term. Even though there is intense competition in this area, the company’s deal with Nissan clearly shows its bright prospects. I expect more of such deals to be announced in the future.
Beating the heat of the competition
Last month, Pandora Media Inc (NYSE:P) reported its fourth quarter results for 2013, posting an increase of 54% in the revenue. This was mainly supported by the subscription revenue, which increased 74% to $16.1 million on an yearly basis. Following results, the stock is trading up around 15%, with a total return of 42% since the beginning of 2013.
Just after six years of its launch in the U.S., Pandora Media Inc (NYSE:P) has achieved a milestone of 200 million users. This is because of the fact that it has an upper hand in offering personalized radio services on smartphones and other devices. I believe this robust performance can put a dent on Sirius’ performance in the future.
To ward off this competition, Sirius is working towards shifting to the internet as its medium, and to promote its online streaming app. This will further help the company broaden its user base and compete against the internet-based competitors. The company will provide complete integration between internet radio and satellite radio, beginning from the 2014 models of General Motors, Nissan, and Toyota.
Following this integration, users will be able to enjoy a better experience with playlist programming on the move. Also, they would be benefited from a new service known as My SXM, which is currently in its beta phase. This service will let users customize their favorite channels as per their preference. This service will directly compete with Pandora’s offerings, providing a personalized experience to the user.
Bottom line
After touching its lowest point three years ago, Sirius XM has come a long way. The stock is up more than 40% in the last one year. I feel there is still a healthy upside potential in the stock, considering the above discussed growth drivers. The company has seen tremendous growth in its subscriber base in the last few quarters, beating its own guidance.
With U.S. auto sales again picking up the momentum, this growth will continue in the future as well. Seeing Sirius’ significant growth in the automobile market along with improved cash flow and share buybacks, I recommend it as a buy.
The article Don’t Overlook This Cheap Stock originally appeared on Fool.com and is written by Madhu Dubey.
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