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Under Threat From Apple, Sirius XM Is a Stock to Stay Away From

July 03, 2014 | About:
jaggom

jaggom

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Sirius XM (SIRI) has bounced back after Liberty Media decided not to bid for the satellite radio provider. Liberty Media owns 53% of Sirius and wanted to buy it out completely for $3.68 a share. However, Sirius seems to be in troubled waters as it sees tough competition from Apple (AAPL), which is promoting its iTunes Radio aggressively.

Smart move by Apple

According to Peter Kafka of Re/Code, National Public Radio will be included as the first radio station on Apple’s iTunes Radio. Apple launched iTunes Radio last fall and it was basically designed for music fans. But, the company has gone a step ahead now and diversifying its reach. Also, National Public Radio will be launching its first news station to Apple’s audio streaming service, which will help increase its market share.

National Public Radio is expected to offer free stream 24 hours a day on iTunes Radio, with mixed live news from various segments such as pre-recorded shows like “All Things Considered” and “The Diane Rehm Show." Also, it has stated that within weeks, some of the broadcasters' local stations should begin offering their own stations, with a similar mix of live and taped news.

Besides, Apple has recently launched its CarPlay service that could take market share away from Sirius. CarPlay is a rebranded version of iOS for automobiles, and it could change the face of in-car infotainment. Also, it has been observed that the likes of Ferrari, Mercedes-Benz, and Volvo have already started shipping CarPlay-enabled cars.

Going forward, Apple is slated to include Honda, Hyundai, Jaguar, BMW, Chevrolet, Ford, Kia, Land Rover, Mitsubishi, Nissan, Peugeot-Citroën, Subaru, Suzuki, and Toyota as partners. Hence, Apple’s presence across all these manufacturers is a serious threat for Sirius XM.

Strong performance so far

Sirius XM has been consistent with its performance, as it added 1.66 million subscribers in 2013. Sirius now has over 25.5 million subscribers. Also, it is capitalizing on the fact that about 16 million cars are expected to be sold this year in the U.S. But, the advent of CarPlay and Apple’s ties with a slew of major car makers will definitely be a major concern for Sirius.

Sirius' market penetration rate at major automakers in the last quarter was 71%, the highest in the history of the company. Further, Sirius expects the penetration rate to be approximately 70% this year. Hence, while Sirius might go great lengths to explain how new cars are being launched with satellite radios in the current year, it doesn’t expect a major boost in its penetration rate.

In addition, Sirius witnessed a higher penetration at Toyota and Honda last year. Also, it has extended its agreement with Nissan through 2018, and Nissan will now be significantly expanding satellite radio penetration across its entire model lineup.

However, as mentioned earlier, all these manufacturers will also be offering Apple’s CarPlay going forward, and so Sirius might not be able to achieve its ambitions.

Nevertheless, Sirius looks very strong as new cars sold with a satellite radio are estimated at 11 million this year, which is up from 10.7 million last year and 9.6 million in 2012. Also there are now about 60 million vehicles on the road today with a factory-installed satellite radio, and this number is expected to nearly double in the next five years as satellite enabled vehicles exceed 110 million.

Hence, this looks like a solid endorsement of Sirius’ prospects, but since Apple is offering a more comprehensive solution through CarPlay that would virtually put an iPhone into cars, customers might opt for it since it is offering more than just radio. Also, considering the huge number of iPhone users in the U.S., it won’t be surprising if CarPlay gains solid traction going forward.

Conclusion

Sirius XM is trading at a trailing P/E of 53, which indicates that the company is highly overvalued. Also, its earnings dropped 58% in the previous quarter, while its revenue grew just 12%. Besides, it has a debt of $3.6 billion, while its cash stands at $138 million. Therefore, investors should seriously think of exiting this overvalued stock as it is under attack from Apple and could lose its wheels in the long run.


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