For all the fuss over Apple's plans to push into the connected-car business, starting with Apple CarPlay, the plow horse in the in-car media race isn't dead yet.
In fact, in-car audio leader Sirius XM is proving to be surprisingly resilient as low oil prices make car buyers more likely to replace their autos and less thrifty with ongoing car-related spending, like a Sirius subscription.
You don't attract the attention of Liberty Media chairman John Malone without some cards to play, and for a company that has had a mixed track record over the years—and even flirted with bankruptcy—Sirius has some short- and long-term levers that could work to its advantage, even as the in-car competition heats up.
You can call Sirius a poor man's Netflix located at the dealership. Because analysts say the surprises boil down to Sirius' focus: The automotive market that Apple and Google and the rest of Silicon Valley is anxious to conquer is already Sirius' strength.
Cars are where people listen to the most radio, and key comparative advantages like Howard Stern's show and streaming NFL broadcasts protect Sirius from an onslaught of free-streaming competitors. Even with the radio industry wide open after the Internet disruption from Spotify and Pandora, among others, Sirius' stock is acting like a growth story.
"They'd be the first to admit music is a commodity," Maxim Group analyst John Tinker said. "The other half [of Sirius content] ranges from Stern to the NFL to eight comedy channels to the odd right-wing wacko on the news side. That's the real differentiation."
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Sirius XM shares are up 12 percent this year and 26 percent in the past one-year period through April 28, even after a slight profit miss of Wall Street expectations reported on Tuesday.
Sales rose 8 percent in the most recent quarter, to $1.08 billion, just under forecasts of $1.09 billion. But the company raised its 2014 guidance on revenue and new subscriber additions, citing an acceleration in the pace of new subscriptions and an unexpected dip on cancellations. The company projected it will add 1.4 million new customers in 2015 as it makes $1.6 billion in EBITDA on $4.47 billion in sales.
Right now Sirius is boosted by an improving economy and lower gasoline prices, which seem to be making consumers less nervous about the monthly cost of a basic Sirius subscription, CEO Jim Meyer said on a conference call with analysts.
More than 70 percent of new cars being sold in the U.S. come with a Sirius trial subscription, and auto sales in the first quarter rose 6 percent from a year ago, the company said. Also, the company is losing existing subscribers at a slower pace than it expected.
"With the improvement in the economy and lower gasoline prices, it's helping churn rates," Meyer said.
Sirius generates a lot of its own content, but unlike Netflix, they don't pay a lot for it. These guys work in 3-foot by 3-foot cubicles, and that's a channel.John TinkerMaxim Group analyst
In the short term, Sirius is benefiting from two big things it's doing to boost sales, and two more things it's doing to boost profits and its stock price. First-quarter net income was $105.7 million, or 2 cents a share. The gap between $1 billion-plus EBITDA and net income mostly reflects the $5.1 billion debt load at Sirius, whose controlling shareholder is Liberty Media's Malone, known for loading debt onto companies while plowing profits into share buybacks.
The biggest sales push now is to extend Sirius into the market for used cars, followed by the company's ongoing efforts to add more exclusive programming, such as upcoming channels for comedian Jeff Foxworthy and "Real Housewives" impresario Andy Cohen. Conversion rates for used-car buyers have been rising, a reflection of lower gas prices, Maxim Group analyst John Tinker said.
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The boost in revenue is moving straight toward Sirius' bottom line, because its largest expenses are for programming and don't change when more people sign up. A record 37 percent of sales moved down to profit before interest, taxes and noncash expenses, the company said. The model scales because only about 20 percent of Sirius' revenue goes for content, even though Stern makes a reported $80 million a year.
Sirius XM's market cap was neck-and-neck with Netflix before the most recent earnings sent Netflix shares up 35 percent, and yet it trades at one-third the price-to-earnings ratio of the Internet streaming company and 14 times estimated 2015 EBITDA, versus Netflix trading at 85 times its 2014 EBITDA (Netflix doesn't provide EBITDA guidance). Those aren't the only points of comparison between the two in which Sirius comes out looking favorable.
"Sirius generates a lot of its own content, but unlike Netflix, they don't pay a lot for it," Tinker said. Other than Stern, "these guys work in 3-foot by 3-foot cubicles, and that's a channel,'' he joked.
There's one stat where Sirius doesn't come out ahead: It's the most shorted stock on the Nasdaq. On a percentage basis, though, Netflix short bets represent 12 percent of its float (the shares that trade openly on the exchange), while for Sirius, the shorts are only 6 percent of its float.
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Another Malone tendency is that Sirius' rising cash flow translates directly into big share buybacks. The company has retired 843 million shares in the last year, chief financial officer David Frear said, helping drive cash flow per share up 36 percent. "In the real world, that's a pretty serious number," Tinker said.
The company says the growth can keep going, even with incursions from streaming services that can be used with cars' Bluetooth connections and the arrival of Apple's Car Play technology and Google's Android platform.
"The question has been, and will continue to be, will people pay for radio?" Meyer said. "I believe we have proved that very close to 28 million people today will pay for radio, and that is really our task going forward. Forget about how it is delivered."
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Executives said on the call that 16 million customers will try Sirius this year and that number will rise to 24 million annually within a few years. About 40 percent will buy the service after a free trial, and Sirius loses about 1.8 percent of paying customers each month, so the net effect should be about 1 million extra subscribers a year on a base of 27.7 million, Barclays analyst Kannan Venkateshwar said.
"This is one of the biggest retail businesses [in media], and outside of Netflix, there is no one growing as fast as Sirius,'' Venkateshwar said.
The longer-term question is what will happen as truly connected cars come closer to reality, Tinker said. Sirius' edge may be that compared to Google or Apple, it's a more docile partner for automakers, he explained. And the company has one other card up its sleeve: It's still sitting on separate bands of satellite spectrum it can use to keep an edge on rivals.
"A driverless car is coming," the Barclays analyst said. "They could do TV on that spectrum. That's what makes Sirius so special in a driverless car. And the one thing we know about spectrum is that its [price] goes up and up.''
—By Tim Mullaney, special to CNBC.com
