Here at SiriusBuzz, we make a big deal out of increased penetration rates of satellite radio in the OEM channel. As the month of August begins to draw to a close, some reports are already coming out regarding weak sales, although they are expected to be better than July.
Recent articles put the current annual rate of US car sales at 13.4 million, which is much higher than the 12 million vehicle estimate given only a few weeks ago, yet lower of course than the 16.1 million sold in 2007. In 2006 that number was 16.55 million. It is this larger than expected slide that has caused nervousness in the sector.
Despite weak sales, many analysts such as Tony Wible of Citigroup contend that the increased penetration rates will more than offset the decline in US auto sales. Let's look at the the numbers:
2007: 16.1 million x 40% pentration = 6,440,000 satellite radio equipped vehicles sold
2008: 13.4 million x 50% penetration = 6,700,000 satellite radio equipped vehicles sold
(For arguments sake, lets make some oem sales assumptions regarding 2009)
2009: 12 million x 60% penetration = 7,200,000 satellite radio equipped vehicles (worse case scenario)
With a subscriber take rate of approximately 50% , this clearly demonstrates that satellite radio sales through the oem channel will continue to rise. Contrary to popular belief however, analysts are not stupid. Most of their satellite radio growth models correctly forecasted the increased penetration rates, but they were based on annual sales of more than 15 million units, and as such, most have lowered their growth forecasts for the next several years. This has affected the stock price.
Despite the seemingly doom and gloom scenario the potential exists for more than one upside surprise. Sirius XM cannot do anything about high oil prices nor can they do much to increase overall auto sales. The thing they can do, is increase the take rate on the new cars that are in fact sold.
The potential for this exists ironically from the retail channel as most expect a major marketing campaign this fall. Already we have seen a glimpse of this through company issued statements that over 18 million people have adopted the service. The reason everyone has or wants a flat screen HD TV is because of the perception that everyone else already has one. As the popularity of satellite radio continues to grow, so too should overall demand. Just increasing the OEM take rate rate from 50% to 60% would have a dramatic effect on the bottom line, analyst forecasts and the stock price.
Position: Long SIRI