SiriusXM Holdings Inc. (SIRI) is on the verge of several new initiatives that promise strong, sustainable growth over the next several years. The satellite radio service provider is making the right moves in many directions, and this is cumulatively going to make Sirius a more valuable company in terms of revenue and profitability.
Let’s look at just some of SiriusXM’s past and current achievements in the new car segment, and chart a growth map on the strength of new opportunities in the used car segment.
Strong Subscriber Growth and High Penetration in New Car Segment
The first measure of success for any subscription-based service is, naturally, it’s active user base.
Source: Company Filings
On that front, SIRI is averaging a healthy 7%+ over the past several years. The growth in subscriber base is, for now, driven by the new car conversion rate, which has been holding steady at around 40%. That means 40 out of every 100 new car buyers that had Sirius installed are opting to continue the SiriusXM service at the end of the trial period. The actual uptake in new car line up is actually at around 78% right now; meaning, three in four cars roll out of the assembly line with Sirius technology pre-installed.
The reason it won’t go much higher than that is cost. Sirius initially started installing these in high-end automobiles where the additional cost burden would be a relatively small percentage of the overall cost of the car. As they travel down the model line-up for each of the manufacturers they partner with, the return on investment in installations gets tighter, and the uptake rate post the trial period gets lower because a large percentage of buyers of low-priced cars don’t have the kind of disposable income or the inclination to continue to pay for a premium radio service they received as a trial.
The current 78% is very close to that point of resistance, so we can’t expect it to go much higher than that.
On the other hand, the actual value for the company is when these car buyers extend their service beyond the free trial period. At 40%, that’s still a healthy figure, although the service has seen some contraction over the past three years.
During the last quarterly results, Sirius said that it expected conversion rates on new cars to hover around the 38-40% level moving forward.
Normally, that would not set off any alarm bells, but being the kind of forward thinking business that Sirius is, it isn’t leaving anything to chance…and that brings us to the most significant of the many initiatives I spoke about.
Used Car Installations and Subscriber Conversions
The logical move after new car installations is used cars, and Sirius is moving in fast on this segment. It already has an uptake of 6 million used car customers for the free trial period as of 2015, approximately 30% of which are expected to convert into paying subscribers.
The used car market is more than two and a half times the size of the new car market, and penetration in that segment, according to a Forbes estimate, is much lower than in the latter.
This means a wide-open opportunity for Sirius to penetrate that market. Of course, they may not be able to achieve the 40% conversion level for used cars but, if they even manage to penetrate 20% of the used car market and convert 30% of that into paying customers, that means an additional 8 million paying customers.
If they achieve those penetration and conversion levels, subscription growth rates of over 10% are a reasonable estimate.
With 6 million installations creating nearly 2 million new customers, the growth for this segment is promising. Assuming that the projections are accurate, if Sirius can double the uptake to 12 million over the next two years and triple it in the next decade, they’re looking at 35-50 million subscribers from the new and used car market combined.
That’s great news for their growth.
That’s why Sirius is aggressively networking with used car dealerships across America to the tune of 19,000 or more. Naturally, that figure will also top out after a point, but they’re still only at the 50% mark on that front.
To be sure, Sirius is leaving no stone unturned when it comes to studying the potential of this market and grabbing every opportunity that comes its way. They’ve already signed up with about 80 Jiffy Lubes to get data on radio installations and active status; they are in talks with auto loan companies; they’re even approaching companies that have websites or mobile apps related to the used car market to make sure every angle is covered.
This kind of drive will easily help them double their used car installations as early as 2018, in my opinion. Seen in combination with a 30% conversion rate, that’s a solid growth curve over the next few years.