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Sirius XM – The Classic Value in Digital Entertainment

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It might be hard for some investors to believe, but there is a classic value buy in the world of digital entertainment. That value is Sirius XM (NASDAQ: SIRI), the satellite radio company that even Warren Buffett holds a small stake in, according to Kiplinger.

Sirius is a classic value play for two readily apparent reasons: It is very cheap, and it makes money. Sirius was trading at around $4 a share on December 18, 2015, yet it reported a revenue of $4.465 billion and a net income of $518.21 billion on September 30, 2015. It also reported a profit margin of 14.24% on the same day.

Those are tremendous financial numbers for a digital radio service. Sirius’s closest benchmark, Pandora Media (NYSE: P), reported a net income of -$137.97 million on the same day. It also reported a profit margin of -27.58%.

Sirius seems to have bucked the trend in digital media through a rather old fashioned method. Unlike Pandora, which gives a product that it has to pay for—music—away for free, Sirius charges subscriptions, which generate float. More importantly, the number of Sirius subscribers and the float they generate is increasing.

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Sirius’s Growing Subscriber Base

Statista reported that Sirius had 28.96 million subscribers in Third Quarter 2015, a 2.26 million increase over Third Quarter 2014, when the service had 26.7 million subscribers, and a 3.36 million increase over the same period in 2013, when it had 25.6 million subscribers. If you go back to third quarter 2012, Sirius had 23.37 subscribers.

That means Sirius’s subscriber base has grown by around six million in just three years. It also means Sirius has been adding around two million subscribers a year. Naturally, investors will want to know if those subscribers are helping Sirius make more money. The answer that Sirius’s financial numbers provide for that question is yes.

In September 2012 Sirius reported a TTM revenue of $3.293 billion. By September 2013 that number had grown to $3.691 billion, by September 2014 it had reached $4.09 billion and this year it hit $4.465 billion. The subscriptions are translating into higher revenues, but more importantly, they are generating income.

How Sirius Makes Money

Sirius’s net income has fluctuated greatly over the past few years. It hit $3.388 billion in September 2012, fell to $468.36 million in September 2013 and $414.32 million in September 2014 then rose to $518.21 million this year. Most importantly, Sirius, unlike Pandora, has never lost money over that period; it has always reported income.

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This indicates that Sirius’s subscriptions are generating enough income to keep the company going and growing. What’s more intriguing is that Sirius’s free cash flow was growing until this year. In September 2012 Sirius reported a free cash flow of $195.21 million that rose to $256.98 million in September 2013 and $267.27 million in third quarter 2014 until dropping to $158.9 million this year.

The most important indicator of float is Sirius’s cash from operations. In September 2012 Sirius reported $728.53 million in cash from operations; by September 2013 that figure had risen to $1.037 billion. That number rose to $1.247 billion in September 2014 and $1.266 billion in September 2015. The cash from operations number shows that Sirius’s business model of selling diversified entertainment and charging a subscription for it works.

Sirius’s Successful Business Model

Sirius’s success demonstrates that there is such a thing as a successful business model for digital entertainment. Here it is:

  • Charge a reasonably low subscription fee to maintain a constant cash flow and generate some float. In Sirius’s case, it is $4 to $16.99 depending on service, a rate most drivers can afford.

 

  • Offer a wide variety of entertainment. Sirius offers music, comedy, news, talk and sports to drivers.

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  • Make sure you have some exclusive content available that fans cannot find anywhere else. Sirius has one of the biggest names in talk under exclusive contract: Howard Stern. Stern and Sirius just signed an $80 million deal that will keep Howard on the service for the next five years, The New York Times reported. That sounds like money well spent and helps Sirius move onto other platforms because Howard will be able to market his older shows and some video content through a new Sirius app, which could generate more revenue.

 

Therefore, if you are seeking moneymaking digital entertainment stocks, Sirius would be a good benchmark. Other companies that demonstrate some of its characteristics should make money in this difficult arena. Companies that do not follow that model, like Pandora, will lose money.

So yes, there is such a thing as a value investment in digital entertainment. It is called Sirius XM, and it makes its money the old fashioned way: by charging a subscription.