Sirius XM Radio Inc (NASDAQ:SIRI) is up over 100% since the two satellite companies merged, Sirius and XM. With the stock up so much is it really a good time to buy in? We think so. Sirius’ last quarter results broke records with respect to subscriber addition, where Sirius’ subscriber base up 10% year over year. The pre-announcement of 3Q results showed that net subscriber additions came in 100,000 above estimates, at 446,000 subscribers.
Sirius trades below $3 a share, but has attracted notable investor Steven Cohen. Cohen and his firm SAC Capital took a serious interest in Sirius during 1Q when it upped its stake to almost 100 million shares. In 2Q Cohen added 14% to his position and now owns over 114 million share—around 3% of Sirius’ outstanding shares. Other notable investors that each owned over 60 million shares at the end of June were John Griffin and Philippe Laffont—see all fund owning Sirius.
The biggest competitor to Sirius of late is Pandora Media Inc (NYSE:P). Sirius is estimated to own around 70% of the market for auto music services, with Pandora being its stiffest competition for this segment. Pandora went public in mid-2011, but is since down over 30%. The company has seen less than stellar execution on advertising monetization, as well as a slew of competition coming to market. In the last month alone, both Facebook and Microsoft announced music services, not to mention the up-and-coming startup Spotify that is considered the leader in the streaming music market. As well, there is speculation that Apple may license music for a custom ratio service akin to Pandora’s.
Sirius should be safe from the recent music services announced by Microsoft Corporation (NASDAQ:MSFT) and Facebook Inc (NASDAQ:FB). For one, Microsoft’s Xbox Music service will only be available on Microsoft platforms, while Facebook Music will not be a standalone service, but will rely on partnerships with other streaming services. Both of these features will be big hits for their respective companies, but we do not see any overlap into Sirius’ market. We appreciate Sirius’ singular focus on perfecting its satellite services and embracing its niche in the auto industry.
On the other hand, Facebook is struggling with monetization and may struggle to reach revenue growth targets. As a result, the company is attempting to add various features that might help with making the company money. We see Facebook having enough initiatives that it is trying to execute to worry about Sirius. The same goes for Microsoft, who has a gambit of operations that range from mobile, social networking, computers, gaming systems and tablets.
In addition to battling other competitors, Sirius is also fighting a takeover from Liberty Media Corp. (NASDAQ:LMCA). Liberty owns interests in a variety of companies in the media industry, including Live Nation Entertainment. The company also took a 17% stake in Barnes & Noble, Inc. back in late 2011. The takeover bid from Liberty includes an ongoing application to the FCC to take a more than 50% stake in Sirius, where the company currently owns just around 49.6%.
Worth noting is that as Liberty seeks to increase its share ownership, the company’s CEO has been downsizing his position quite noticeably. We generally take such consistent insider selling activity as a bearish sign, but in this case the uncertainty of the Liberty takeover and company fundamentals outweigh our concerns—especially since corporate governance may be a top focus of Liberty’s should they gain majority control.
Earlier this year Sirius upped their prices, which has resulted in higher average revenue per user numbers. Even amidst the price hike, the company’s churn rate has remained relatively in line. Sirius revised subscriber targets upward and the company is expected to add 1.9 million and 1.7 million net subscribers in 2012 and 2013, respectively. The primary driver for the increase in subscriber base will be auto sales. We believe that auto sales will be strong as a rebound in the economy looks to be a possibility in the coming years. The big overhanging issue for the company remains to be Liberty Media’s appeal to take de facto control of the company.
However, it appears that Liberty will ultimately gain effective control of the company; the question becomes what will the impact for Sirius be? The comments from Liberty suggest a change of corporate governance and capital allocation. Based on strong fundamental growth and accounting for the near term uncertainly of the Liberty takeover, S&P placed a $3 price target on the company, versus the its current stock price around $2.80. We believe once the Liberty Media saga is finalized, the stock will have a more defined direction. Direction, which we believe will provide a boost to the stock price. The Liberty overhang is keeping the stock down and preventing the market from accounting for the potential uptick in auto sales and an increased subscriber base.
