SIRIUS Satellite Radio, Inc. merged with XM Satellite Radio Holdings, Inc. in July 2008 to form what is today Sirius XM Holdings, Inc. (NASDAQ:SIRI). Since then, the company’s revenues have grown at a compound annual growth rate (CAGR) of 9.17% after posting huge losses in both 2008 and 2009.
From 2010 through the end of 2015, Sirius XM stock has grown earnings per share (EPS) at a dramatic CAGR of better than 44.2%. SIRI stock has advanced at a spectacular 37.21% CAGR.
But why has Sirius stock flat-lined for the last nearly three years?
It could be that Sirius stock has been suffering from the same illness that plagues satellite and cable television providers. The issue facing pay-TV providers is that high-speed, streaming, and on-demand services can get entertainment to consumers with as much—or more—variety, at faster speeds, and cheaper prices. And this may be what SIRI stock is about to face.
Sirius XM Stock: Subscriber Challenges
When Sirius XM reported its 2015 full-year earnings, the company noted that three out of every four new cars sold in America included factory-equipped satellite radio. Given that more than 17 million new cars were sold in the U.S. last year, that would put the total number of potential new subscribers at about 12.8 million. (Source: “Form 10-K,” U.S. Securities and Exchange Commission, February 2, 2016.)
Unfortunately, Sirius XM stock attracted just 2.3 million new subscribers in all of 2015, an increase of some eight percent over the year before. That means fewer than 18% of Americans who bought new cars activated the satellite radio that came with it. (Source: Ibid.)
Now, let’s compare this to the customer acquisition of a company like Netflix, Inc. (NASDAQ:NFLX). When Netflix reported earnings for the second quarter of 2016, the company told shareholders that new members (subscribers) increased by 1.7 million in just that quarter. Netflix currently has more than 83 million members and a viable audience pool of about a billion. (Source: “Q216 Letter to Shareholders,” Netflix, Inc., July 18, 2016.)
But the two companies are different, you might suggest. I disagree.
Only their products and delivery mechanisms are different. Fundamentally, I believe that they are very similar; they both deliver entertainment in non-traditional ways. These days, consumers are increasingly choosing Netflix over cable or satellite providers. And more television viewers are watching programming on something other than a TV. This is why pay-TV providers still have audience penetration rates in U.S. homes similar to what they had back in 2005. (Source: “82% of Households Subscribe to A Pay-TV Service,” Leichtman Research Group, Inc., September 23, 2016.)
Netflix has benefited as more people go cord-cutting in search for more interactive, on-demand, and less expensive entertainment options. In my opinion, Sirius XM is at risk from the same consumer sentiment that has benefited Netflix.
Not only is commercial radio currently free, but it now appears that Amazon.com, Inc. (NASDAQ:AMZN) and Pandora Media Inc. (NYSE:P) are set to deliver a Netflix-like service that could stream music and other entertainment live to your car’s audio system from your smartphone. And the service would be available for a fraction of the cost of a Sirius XM subscription. (Source: “Amazon and Pandora to Gauge Music’s Value in the Internet Age,” The New York Times, September 11, 2016.)
SIRI Stock’s Serious Competition
Pioneer Electronics, a manufacturer of car audio systems, makes this problem for Sirius XM even more tenable as they recently introduced an updated version of an in-dash satellite receiver that can detect Pandora Internet radio settings from smartphones.
This could present meaningful competition for Sirius XM as Pandora’s 78 million active subscriber base is more than twice the number of subscribers that Sirius XM has. (Source: “Pandora Reports Q2 2016 Financial Results,” Pandora Media, Inc., July 21, 2016.)
So, the market may be signaling that changes are on the way that could present serious problems for Sirius XM stock.