Entertain the thought
So it’s a given we’re going to see the connected car become ubiquitous; the saving grace for Sirius at the moment is the sketchiness of 4G service. Smartphone users regularly suffer with less than optimal speeds despite carriers that tout them as defining characteristics, and connecting smartphones, tablets, and other devices to their cars to bring streaming video, music, and whatever else into the passenger compartment isn’t about to improve the situation. Of course, the larger, unasked question is, with distracted driving already a concern, do we really want everyone to be so connected when they’re driving?
But entertainment in the car is a known quantity and has been a threat for years. This is really just a new version of it, but it still suggests that satellite radio may indeed be a transitory technology when it comes to in-car entertainment. Still, there are other concerns to consider as well.
A king’s ransom
Costs are going to be rising for Sirius, as the Copyright Royalty Board imposed new, higher royalties based on the satellite-radio operator’s gross revenues. Sirius will pay 9% in 2013 — up from 8% last year — and it will rise a half percent annually until it hits 11% in 2017. Of course, that’s better than what the studios were looking for when they sought a 12% royalty rate this year, increasing 2% annually and topping out at 20%, but it means investors can expect Sirius to not only pay more money each year, but if its business continues to expand, the costs it will incur because of that will grow as well.
Sirius XM Radio Inc (NASDAQ:SIRI) estimates it has a 68% penetration rate in OEM sales and expects that to be nearly 100% over the next five years. Add in the used-car market and service enhancements (i.e., MySXM custom channels), and it appears Sirius’ ability to meet its 1.5 million net subscriber adds looks doable, making an otherwise challenging environment somewhat less risky.
Shares of Sirius are up 37% over the past year and are 77% higher from their 52-week low, but at $3 a share, they’re trading at almost 24 times estimated earnings and six times sales, suggesting that the company has come a long way already and may not be a bargain anymore.
I’ve been fairly bullish on Sirius XM Radio Inc (NASDAQ:SIRI)’s stock up till now, but let me know in the comments box below whether it’s still OK to tune in and turn on, or should we just drop out?
The article Sirius XM Radio: Tomorrow’s Monster Stock? originally appeared on Fool.com.
Fool contributor Rich Duprey owns shares of Apple. The Motley Fool recommends Apple, Ford, General Motors, and Tesla Motors and owns shares of Apple, Ford, and Tesla Motors.
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