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Robert Stephens, CFA
Robert Stephens, CFA
Articles (95) 

Why Sirius XM Could Deliver Improving Returns

The company’s strategy may catalyze its stock price performance

December 03, 2018 | About:

The acquisition of Pandora (NYSE:P) could catalyze Sirius XM (NASDAQ:SIRI)’s stock price performance. The two companies are expected to deliver synergies as well as cross-selling opportunities.

The acquisition of Automatic Labs last year may offer growth potential within the growing smart services segment of the automotive sector. A cross-promotion deal with Amazon could increase the company’s exposure to the smart speaker market, which is forecast to treble in size in the next four years.

Although competition from streaming services is high, Sirius XM has a loyal customer base and is investing in content. Having gained 10% in the last year versus a rise of 5% for the S&P 500, it appears to have investing appeal.

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Pandora

The acquisition of Pandora has the potential to boost Sirius XM’s financial outlook. It is set to diversify the company’s revenue streams, as well as provide synergies. Sirius XM will gain access to Pandora’s mobile, digital and advertising opportunities, while Sirius XM's financial strength and exclusive content could help Pandora to compete against rival streaming services.

Cross-selling opportunities could provide a catalyst for the two companies, which are due to maintain separate brand identities. Pandora will gain access to Sirius XM’s 36 million subscribers in North America, while Pandora’s 70 million monthly active users may be receptive to Sirius XM’s product offering.

Pandora will provide Sirius XM with a stronger mobile presence and help it to diversify away from a dependence on in-car customers. It will also provide data regarding online listener behavior as well as digital-marketing opportunities. This could deliver incremental revenue in an area where Sirius XM has struggled to gain momentum in the past. With improved overall finances, the enlarged company may become increasingly competitive versus leading streaming services such as Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN) and Spotify (NYSE:SPOT).

Strategy

The acquisition of Automatic Labs in 2017 has provided the company with an aftermarket solution to offer smart services in almost any vehicle. This could allow it to remain competitive where smartphones and smart speakers are creating new opportunities in the audio segment. It recently launched a new Dealer Program to grow its distribution, which is live at a number of pilot dealerships. It enables features such as roadside assistance and connected main services to be offered for free to customers by dealers. This could help to improve the customer experience and create long-term relationships between dealers and their customers.

Sirius XM has also entered into an agreement with Amazon to cross-promote its products. Customers who buy an Amazon Echo smart speaker can get three months of Sirius XM Premier Streaming or All Access services. Customers who purchase a six-month subscription for either of those products will receive an Amazon Echo Dot for free. This is in addition to the company’s presence on Amazon’s Alexa platform, which could gain momentum as the smart speaker installed base is forecast to treble by 2022.

Potential threats

One risk to the company’s outlook is the variety of audio options available to consumers. Unlimited data has meant that streaming services on phones provide a realistic alternative to satellite radio. They offer all-you-can-listen music packages, as well as a range of podcasts and sports programs that may reduce Sirius XM’s competitive advantage. Since many streaming services offer basic packages that are free in return for ads being present, consumers may begin to feel that they do not require subscription audio services.

To counter this threat, the company is investing in exclusive content as it seeks to improve its competitive advantage. It is creating music channels from major artists that have been popular with listeners. It is also expanding its presence in talk and sports shows, as well as college sports channels. Given that terrestrial radio is expected to continue to decline in future years, the company may have a wider range of premium audio content creators available. Subscribers also seem to be loyal, with revenue and subscriber numbers proving to be sticky.

Outlook

The acquisition of Pandora has the potential to provide cross-selling opportunities and synergies. It could increase the company’s ability to compete with major streaming services. The acquisition of Automatic Labs in 2017 could lead to incremental revenue growth in the smart services segment of the automotive industry. The deal with Amazon to cross-promote products builds on its existing exposure to the Alexa ecosystem and provides access to the rapidly-growing smart speaker market.

Although mobile streaming services are a threat to Sirius XM’s growth outlook, loyal customers and continued investment in differentiated content may provide a competitive advantage. Having outperformed the S&P 500 in the last year, further capital growth could be ahead.

Read more here: 

SiriusXM: Is Pandora a Good Acquisition?

Warren Buffett’s Sirius XM Sets Deal With Pandora

Sirius XM: When Is the Next Leg Up?


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