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Morningstar | SiriusXM Retains Its Spot in Cars Despite Streaming Competition; Launching Coverage with $5.30 FVE

We are launching coverage of Sirius XM Holdings with a narrow moat rating, stable moat trend, and $5.30 fair value estimate. Our $5.30 fair value estimate for Sirius XM Holdings implies 2019 price/earnings multiple of 24, an enterprise value of 13 times 2019 adjusted EBITDA, and a 6% free cash flow yield.

Sirius XM Holdings consists of two businesses: SiriusXM and Pandora. SiriusXM transmits music, talk shows, sports, and news via its two satellite radio networks, primarily to consumers in vehicles who pay a subscription fee. The firm’s radios come preinstalled on a wide range of light vehicles in the U.S. and Canada. The firm creates and operates the vast majority of the stations on its satellite radio networks.  SiriusXM ended 2018 with just under 29 million self-pay customers.

SiriusXM has agreements in place with all of the major car makers to install radios with the capability to receive the satellite service in cars. Most new cars with SiriusXM radio come with a three- to 12-month trial period for the SiriusXM service that is paid for by the automaker in certain cases. The conversion to self-pay after the trial is roughly 40% and represents the vast majority of new subscriptions for the company. These self-pay customers have a monthly churn of roughly 1.8%, implying a customer life of around 4.5 years. SiriusXM does share some of the revenue from the self-pay customers with the automakers in the form of loyalty payments. Over the next five years, we expect that the satellite service will continue to expand, albeit slowly, by converting enough new car owners to self-pay in order to offset churn losses and by discounting the prices of subscriptions to retain customers.

The company acquired Pandora Media in February 2019. Pandora is a streaming music platform that offers an ad-supported radio option and a paid on-demand service. Pandora still generates the majority of its revenue via advertising to consumers of its “radio” service who listened to over 14.5 billion hours in 2018. The paid on-demand service only had 5.9 million paid subscribers in the U.S. at the end of 2018 versus 26 million for Spotify and an estimated 28 million for Apple Music according to Reuters. We project that while Pandora will slowly expand its subscriber base over the next five years, the segment will continue to lose money as the royalty payments will remain a drag on operating income generation.