Summary
- Liberty SiriusXM is a Liberty Media/John Malone/Greg Maffei tracking stock that owns 71% of SiriusXM at a 25-30% discount.
- SiriusXM is a gem with strong unit growth baked into the cake through auto penetration along with upside optionality outside the car.
- Liberty SiriusXM provides an opportunity to buy a secular growth story at a meaningful discount by purchasing the tracking stock.
Why I Think There's An Opportunity
I think the story about SiriusXM (SIRI) is that it has a nice toehold in the car right now but will soon be supplanted by streaming audio through phones and connected cars. What this narrative might be missing is that auto manufacturers are very committed to SiriusXM both now and in the future, and SiriusXM's easy-to-use interface in the car has done very well against streaming, terrestrial radio, etc. I think the story-line misses, too, SiriusXM's focus on exclusive content that many listeners cherish, in addition to supplying the talk/news/sports/music they expect from car audio. It's also easy to discount SiriusXM's purchase of Pandora, the once-leader now relegated to the streaming dustbin. That might be a mistake because Pandora provides a big new revenue stream to SiriusXM-advertising-and a very large funnel of potential subscribers to both Pandora streaming and SiriusXM audio. Although SiriusXM faces competitive headwinds, I think investors may be over-looking the long-term growth opportunity SiriusXM promises both inside and outside the automobile. I think the Liberty SiriusXM (LSXMA, LSXMK) tracking stock trades at a discount to SIRI because of typical Liberty complexity (debt, tracking stock accounting, etc.), lower float characteristics, and investor impatience to close the gap between the tracking stock and SIRI. Malone/Maffei/Liberty have a pretty good track record closing discounts over time after wringing economics out of a security (like buying back LSXMA/LSXMK at a discount). This will likely take some patience, but the odds are good for winning returns.
SiriusXM
SiriusXM is an automotive satellite radio company with solid numbers. 75% of new cars come with SiriusXM installed at sale, which includes a free trial period to give satellite radio a try. This new car installed base is set to rise to 80% over the next year or two with Toyota making it standard on all its cars. Toyota's decision will likely compel other auto manufacturers to follow suit, boosting the eventual penetration above 80%. Around 45% of used cars already have SiriusXM installed, too, and this penetration will grow as new cars at 80% penetration become used cars over time. That growth seems baked into the cake. The number of autos in operation in the U.S. is around 290 million. 80% penetration on 17 million new car sales per year is 13.6 million new cars capable of becoming SiriusXM subs each year. Add in another 113 million of used cars (45% on 290 total cars minus 17 million new) and you've got a potential market of around 127 million cars. That number will grow to 232 million cars even if new car unit sales remain flat as 45% used car penetration becomes 80% over the coming years. The average car age is currently around 12 years, meaning SiriusXM inventory will go from 127 to 232 million over 12-24 years: a 2.5% to 5% annualized unit growth. That's obviously just the addressable auto market for SiriusXM. Initial free trials with new vehicles turn into paying customers 40% of the time. Add to that 20% paying customers converted in the used car market (a number SiriusXM is working to improve). Put it all together and you get to SiriusXM's reported paying subscribers of 29.7 million last quarter (9/30/19).
