We reaffirm our Neutral recommendation on SIRIUS XM Radio Inc. (SIRI), following its mixed financial results for the fourth quarter of 2010. Nevertheless, the company was able to turn around in 2010 after facing a bankruptcy threat in the recessionary period of 2009.
The results followed a double-digit growth in revenue, significantly higher net addition to its pay-radio services and a meaningful improvement in ARPU. At present, SIRIUS XM is the second largest entertainment subscription service provider in the U.S. after Comcast Corp. (CMCSA).
Improving U.S. economic conditions have resulted in the recovery of auto sector sales together with better-than-expected consumer spends prompting SIRIUS XM to present a rosy picture. The company has a very strong business relationship with original equipment manufacturers. SIRIUS XM owns an extensive satellite network, which streams audio content through more than 130 channels, throughout the U.S.
SIRIUS XM added 328,789 net new subscribers in the fourth quarter of 2010, indicating a substantial growth of nearly 28% year over year. This astonishing net subscriber addition helped SIRIUS XM end fiscal 2010 with a record high total subscriber base of 20,190,964, up 8% year over year. The company is now expected to add 1.4 million net subscribers in 2011. This implies that management is very confident of repeating the fabulous performance in the coming year.
However, we also remain concerned regarding the emergence of alternative technology of commercial Internet radio such as Pandora. Pandora Internet radio has 80 million registered users in the U.S. and provides a unique algorithm that increases the intrinsic quality of the music. In addition to iPhone, Pandora has also developed streaming services for BlackBerry and Android-based smartphones.
Moreover, SIRIUS XM is currently trading at the high-end of its 52-week price range. The stock price has moved up by more than 125% during the last one year and is trading at a significantly higher multiple with respect to several valuation metrics compared with the S&P 500 average and its peers. We believe, SIRIUS XM is fairly valued and provides very limited scope for any above market gain in the near-term.
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