Description

Summary

SiriusXM historically has been somewhat of a complicated story due to the relationship and ownership by Liberty Media. As the discount has largely closed due to the transaction announced late last year and expected to close in a few months, the story has become much simpler. At the current valuation, we believe SiriusXM is miscategorized as a terminally declining business and is, instead, a highly unique offering for today’s consumer with future growth potential. We believe the scale of content and the user experience is differentiated and at a 2025 FCF yield above 10%, there is meaningful upside in the stock. Because of the royalty rate and gross margin differences of streaming and the radio, SiriusXM generates better margins and therefore more free cash flow allowing them to spend more on content, thereby creating a similar flywheel effect as Netflix – larger scale, leads to higher cash generation, leading to more content. While growth has slowed for reasons discussed below, the fundamental business looks strong with an industry-leading churn of 1.7%. The combination of strong and stable business fundamentals and financials with an attractive valuation presents a great risk / reward opportunity.

Company History

• 1990: Martine Rothblatt founds Satellite CD Radio in Washington, D.C
• 1992: David Margolese acquires control, renames the company CD Radio
• 1997: FCC awards a license to XM Satellite Radio
• 1999: CD Radio is renamed Sirius Satellite Radio
• 2000: Sirius launches three satellites into orbit
• 2002: Sirius launches initial service in four cities on February 14, expanding nationwide by July 1
• 2004: Mel Karmazin, former president of Viacom, becomes CEO
• 2001: XM Satellite Radio launches its service on September 25
• 2007: Sirius and XM announce a $13 billion merger
• 2009: SiriusXM avoids bankruptcy with a $530 million loan from Liberty Media
• 2018: SiriusXM announces acquisition of Pandora for $3.5 billion
• 2020: SiriusXM acquires Stitcher
• 2021: SiriusXM acquires 99% Invisible Inc
• 2022: SiriusXM purchases Conan O'Brien's digital media assets
• 2023: Liberty Media announces a spin-off and merger with SiriusXM

Business Overview

SiriusXM is the leading audio entertainment company in North America, offering SiriusXM’s subscription service and Pandora’s music streaming service. Collectively, their services reach approximately 150 million listeners each month.

SiriusXM offers a diverse array of content, including music, sports, entertainment, comedy, talk shows, news, traffic, weather channels, podcasts, and infotainment services. Their programming is available live, curated, exclusive, and on-demand, delivered through proprietary satellite radios and a streaming app. Subscription prices range from $10 for the app to $25 for the premium in-car radio service, which features top-tier offerings like Howard Stern and live events. With approximately 32 million subscribers, the average monthly subscription fee is about $15.

Many compare SiriusXM to Spotify and Apple Music. While they all offer audio content to consumers, the scale of Sirius’s content is a unique and differentiated. For example, the cheapest and easiest way for a consumer to listen to a variety of sports content is through SiriusXM. While it’s undisclosed how much they spend on their sports agreements, they have multi-year agreements with most sports leagues. Credit card data also confirms this point as many consumers pay for both a streaming service and SiriusXM. Their customer satisfaction and engagement remain high compared to their peers.

The other smaller part of their business is Pandora, which they acquired in 2019. Pandora offers a streaming platform for music, comedy, and podcasts, providing a personalized experience on mobile devices, car speakers, and connected devices. Listeners can create personalized stations and playlists, discover new content, and enjoy curated playlists and podcasts. Pandora is available in three formats: an ad-supported radio service, a radio subscription service (Pandora Plus), and an on-demand subscription service (Pandora Premium).

While SiriusXM was adding 1 million+ subscribers every year in 2010s, their growth turned negative after the pandemic. We believe that this is a short-term headwind and for a few factors discussed below, the company should return to subscriber growth.

1. SAARs normalization

Before COVID, new car sales in the United States were over 17 million, growing 2 to 3 % per year. Last year, we were only at 15.5 million. Since Sirius acquires many of its customers via auto OEMs, they have been at a disadvantage for the past couple of years. We believe new car sales will normalize over time as OEMs have fixed their supply chain issues. The higher interest rates have also affected auto affordability and if rates decline, it will positively impact new car sales.

2. 360L Conversion

The company has talked about the 360L opportunity for the last couple of years. Their historical offering is a form of one-way communication but 360L allows the company to receive data back on listener behavior and preferences. This data can then be used to create better and personalized offerings for listeners. They have already mentioned conversion with 360L is higher, even though they pulled back on marketing spend last year as they further refined the product. While it’s still early as 360L is only 40% of their new car subscriptions, we expect the continued 360L penetration should lead to increased subscriber net additions.

3. Streaming Opportunity

One of Sirius’s biggest issues has been their penetration amongst the younger demographic as shown in the chart below. Last year, they revamped their streaming app along with a new lower price of $9.99 to make it more accessible to the younger generation. While they have not disclosed their streaming app numbers, we believe there is further upside for Sirius by acquiring consumers at a younger age. The hope is as they grow older and buy a car, they will be accustomed to the Sirius platform and will be more inclined to get the in-car subscription.

Financials

We believe these growth drivers will lead SIRI to start growing net subscribers again over the medium term. As they implement price increases (which they do every other year with de minimis impact on churn), we believe this business should sustainably grow revenue in the low to mid-single digits. Costs have grown in the past couple of years due to investment in 360L, the relaunch of the streaming app, and new satellite launches. Margins should improve in 2024 / 2025 as spend normalizes and since most of their costs are largely fixed (we estimate ~70% contribution margins), margins improve as they grow. This should lead to 5%+ EBITDA growth and 15%+ FCF per share growth over the next several years, resulting in a 20%+ IRR with some multiple expansion. We believe it offers an asymmetric risk-reward opportunity as the market is valuing them as a melting ice cube; even some growth is very valuable for the stock.

We also believe the closing of the Liberty and SiriusXM transaction will improve the technical attributes of the stock. The increase in the float and the lack of an arbitrage opportunity that has existed for years should reduce the volatility of the stock. It also allows them to be included in more indices and funds.

Management

Jennifer Witz has been the CEO since 2021. She has been with the company since 2002, holding leadership roles across the organization, including the Head of Sales, Marketing and Operations and the SVP of Finance. We believe she has a strong understanding of the customers, the market, and the strategy going forward given her 20+ years of experience at the firm.

Thomas Barry was recently appointed as the CFO in April 2023. Since 2009, he was the Chief Accounting Officer at SiriusXM. He has been with the company for ~15 years since the merger of Sirius and XM. Similar to Jennifer, we believe his long tenure at the firm, during which he has seen the business evolve and grow across cycles, positions him well to help the company succeed.

Risks

• Increased competition from big tech: For the most part, the large tech players have not directly competed with SiriusXM. Apple is the closest big tech competitor with its music streaming service, but as discussed above, we do not see it as a complete substitute. However, if they decide to spend more on content, it could be disruptive to SiriusXM’s business.
• Younger generation has different listening habits: SiriusXM needs to attract some level of the younger demographics as older demographics age out. If not, the business could continue to experience challenges around subscriber growth.
• Cannibalization of in-car into streaming: Sirius’ current ARPU is $15 and their new streaming app launch is priced at $10. For the same content in this $10 package, a consumer would be paying $24 in the car. A consumer could reduce their spend by using the app only and accessing it in the car via Airplay / Android Auto. That being said, the company has not seen any cannibalization issues thus far.
• Macroeconomics: In the event of an economic downturn, consumers may decide to turn off some of their subscription services. We may also see car sales have a short-term headwind in the event of a recession.

Conclusion

SiriusXM is strategically well-positioned with a high quality sustainable value proposition for the consumer. While it has faced challenges in growth over the past couple of years, we believe its current valuation is highly attractive, with a promising outlook back to growth. The stock offers a compelling risk-reward proposition over the next five years.

Catalyst

• Growth of subscriber base
• Continued execution and operational discipline