Satellite Radio Playground

By Demian Russian

In response to Sirius XM Radio’s (NASDAQ:SIRI) announcement that General Motors (NYSE:GM) dealerships will now offer a free three-month trial subscription on every Satellite Radio-equipped used vehicle sold, Janco Partners Director of Research Vijay Singh Upgraded Sirius XM this morning from ACCUMULATE to BUY and raised his price target on the equity from $2.15 to $2.50.

We believe that this deal opens up a larger used car market opportunity for SIRI compared to the couple of Certified Pre-owned (CPO) deals the company has put in place. Considering that SIRI has over 60% market penetration of new cars, there are millions of Satellite Radio-equipped cars that roll off in the used car market offering incremental opportunity to the company. Furthermore, these potential subscribers have low acquisition costs and higher incremental margins.

– Vijay Singh, Janco Partners Director of Research

Singh assumes with there currently being north of 30 million vehicles equipped with Satellite Radio out on the road today, that according to his projections, this number could rise to 75 million over the next five years, assuming the company maintains a ~60% penetration rate. Singh estimates that if 10% of these vehicles reach their end of life, there will be ~68 million Satellite Radio-equipped vehicles out on the road by 2015. If you then subtract 27 million subscribers and 8.7 million deactivated subscribers (who are assumed to maintain ownership of their vehicles) projected in his model at the end of 2015, you arrive at 32 million used vehicles equipped with Satellite Radio. Of those 32 million vehicles, he assumes that 10% or ~3 million may reach “end of life.” Singh increases his conversion rate estimates gradually from a “very low” 12% level in 2011 up to 20% in 2015 – less than half the current conversion rate of 44.7%. In addition, Singh also assumes that the churn rate in the used car market will tick up to 3% from the existing 2% churn rate. Based on these assumptions, Singh believes Sirius XM could increase its subscriber base by over 10% in each of the next projected five years by a rate of 2.8 million subscribers a year. 

“The increase in subscriber base, while keeping ARPU relatively flat and modestly reducing SAC, helps us arrive at our new price target of $2.50 from the previous $2.15,” said Singh. While he notes in his report that Sirius XM’s move to penetrate the used vehicle market is in its early stages, in a conversation with Vijay Singh earlier this morning, he said that he saw upside to his current estimates — as he views his assumptions as being “very conservative.”

Janco Partners Director of Research Vijay Singh will be the special guest on the Wednesday, July 6th, 2011 edition of Playground Radio for an exclusive, live interview.

Disclosure: Long SIRI
Contact the author: DemianRussian@SatelliteRadioPlayground.com