Analysts at Goldman Sachs have this week begun coverage of internet radio provider Sirius XM Radio (SIRI), and they kicked things off with a Buy rating for the company and a 12-month price target of $3.50 for its shares. Sirius stock is up about 2.5% today, to $3.
Even though Sirius has seen a 65% rise this year, the analysts are undeterred, pointing to “robust growth along with accelerating profitability and free cash flow that exceeds peers.”
In particular Goldman predicts that Sirius has so much free cash that it will “aggressively” buy back shares, reducing its share count by 20% through 2015 and by 45% in the next decade.
There are other reasons to like Sirius, according to Goldman: it’s successfully monetized its listeners via subscriptions, and even a recent rate increase didn’t affect its renewals rate. And then of course, is cars. As we saw earlier this month, November’s auto sales hit a four-year high, and with Sirius radios installed in an increasing number of new cars its penetration into the car market is set to boom, from 50 million today — 20% of all light vehicles in the U.S. — to about 100 million in the next five years.
As the analysts write:
Beyond simply penetrating an increasing percentage of auto sales, Sirius XM�s subscriber growth over time remains contingent on its ability to convert its �trial subscribers� into paying ones. Most factory enabled vehicles receive a three to twelve month trial period, with the current subscriber �trial funnel� standing at 6.2mn (about 33% of SIRI�s existing self-pay subscriber base). Of note, despite the rise in competitive threats, execution and targeted marketing have helped keep SIRI�s conversion ratio (of trial to paying customers) constant at 44%-46% in recent years. Hence, as the number of �trial cars� continues to increase (a function of growing penetration of auto sales), a constant conversion ratio should help maintain selfpay subscriber growth.
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