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Here's Why Sirius XM Is a Good Buy Despite an Expensive Valuation

August 19, 2014 | About:

Sirius XM (NASDAQ:SIRI) released solid results for the second quarter of fiscal 2014. The company managed to impress investors with its terrific results, and its shares rose as a result. If we look closely, the results were not so outstanding. However, an impressive growth in subscriptions made investors bullish. Its adjusted EBITDA grew by a handsome 31%, and the company is optimistic about its future.

An impressive performance

Sirius’ revenue grew by 10% as compared to the same quarter of the last fiscal year. The company posted solid net income of $120 million while a strong improvement of 42% was seen in the cash flow. Sirius’ management is pleased with the second-quarter performance, and it expects to post better results in the future.

Sirius has gained good momentum. The main reason behind its robust performance is an improvement in the subscription. The company has produced net subscriber additions of 475,000, which also include self-paying net additions of 380,000. This led the subscription to grow by a record 5%.

Sirius is also expecting the automotive market to power its business higher. The automotive market is gaining steam. The stats reveal that auto sales improved 4% last quarter. At this rate, car sales are expected to increase further going forward.

Good growth opportunity

Moving on, Sirius is also seeing significant growth opportunity in the used car segment. It expects this segment to bear fruit in the coming years as the stats reveal that sales in the second owner market are growing. About 4,000 dealers have already enrolled in Sirius' service lane initiative. With this, Sirius will enhance its distribution channel. However, Sirius thinks that the conversion rate in the second owner market will remain low initially, and it will take some time to gain steam. It is expected to add 2 million subscriptions to its self-pay base.

Moving on to its long-term strategy, Sirius’ One Connected business remains a key growth driver. This initiative is likely to enhance Sirius’ importance to OEMs, allowing it to provide services such as safety, security and other convenient features. With all these impressive advancements, Sirius XM is confident of being a leader in the connected devices space.

Getting better

Sirius is also seeing lower churn rates. A 1.8% churn rate is a clear indicator of the fact that customers are satisfied with the product and the value proposition that Sirius represents. In addition, the company has expanded its free music program, having added three new music channels such as women, women’s pop, country and dance. These channels have unique music formats that are not generally heard on terrestrial radio.

With this initiative Sirius also has a focus on extending its foot print as a leader in music discovery. Sirius has also launched YouTube 15, which will enable it to showcase the newest music videos that come online. This is expected to benefit the company a lot in creating a good position in the music segment as well.

Further, the agreement with Joel Osteen, who is a well-known Christian spiritual speaker, will add subscribers as Osteen has millions of followers listening to his teachings.


Moving on to its fundamentals, with a trailing P/E of 61.16, Sirius looks quite expensive. However, the company has good prospects. Sirius’ strength can be seen in multiple areas such as revenue growth, good cash flow from operations and expanding profit margins. So, as of now, investors shouldn’t mind buying Sirius at a heavy premium considering its strong long-term prospects.

Rating: 5.0/5 (1 vote)



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