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Sirius XM
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==Examining What Might Happen If It All Goes Right or Wrong== Our fair value estimate of $8.25 represents what Morningstar believes to be the most likely outcome for Sirius XM given Morningstar's current outlook for U.S. auto sales and the firm's current strategy. To help frame Morningstar's current outlook, Morningstar has created two distinct scenarios separate from Morningstar's traditional bull and bear cases. These two cases will examine what could happen if it all goes right or wrong for Sirius XM. In both cases, Morningstar will maintain the same U.S. light-vehicle projections and change factors that the firm has greater control over. As shown below, the two scenarios generate fair value estimates of $12 for "all right" and $3.75 for "all wrong." '''Everything Is "All Right"''' In Morningstar's "all right" scenario, the firm emerges from the lower auto supply issues of 2022 with a raft of new agreements with both manufacturers and auto dealers that drive a faster rate of improvement in penetration in both the new and used markets, reaching 90% for new cars and 60% for used ones in 2026. By crafting a deeper product offering with further Pandora integration for both music and podcasts, SiriusXM arrests the decline in conversion rates and improves both rates back to 2016 levels of 40% and 32%, respectively, in 2026. As a result, projected net adds over the next five years for the satellite radio service jumps to 10.4 million, more than double Morningstar's new estimate, and the self-pay subscriber base increased by 32% to over 42.4 million. This more integrated offering lets SiriusXM raise pricing and drive faster subscriber ARPU growth of 5%, resulting in 10% revenue growth up sharply from 4% in Morningstar's base case. Gross margin for the segment would only expand slightly faster to 63.1% in 2026 versus 62.2% in Morningstar's base case as the majority of the cost of revenue is paid out as a percentage of revenue in royalties and revenue share. However, the segment would generate about $1.6 billion more in gross profit over the five-year projection period under this scenario. For Pandora, the addition of more podcasts and content from SiriusXM helps to reverse the decline in listening hours that grow by 3% a year to hit 13.4 billion hours in 2026, the same level as 2019. Due to the growth in listening hours, ad RPM growth averages 11% growth over the next five years. As a result, ad-supported listener revenue jumps 14% per year to $2.3 billion in 2026, 58% above Morningstar's base case. The additional content attracts more subscribers, leading to total net adds of 3.7 million, a paid subscriber base of 9.7 million in 2026, and 12% subscriber revenue growth. Overall revenue for Pandora will expand by 12% annually and reach $3.7 billion in 2026. Unlike SiriusXM, Pandora will be able gain additional leverage on its royalty expenses that allow the segment to improve gross margin to 45.5% in 2026, well ahead of Morningstar's 36% base-case scenario. The increased growth and margin improvement at both segments would create 10.6% average revenue growth and 32.5% operating margin in 2026. In contrast, Morningstar's base-case revenue growth is 5.6% on average and the operating margin only hits 28.3% in 2026. This combination generates a fair value estimate of $12. '''Everything That Could Went "All Wrong"''' Under Morningstar's "all wrong" scenario, Morningstar assumes that new and used car penetration do not improve but hold steady at the 2021 levels. However, conversion rates drop faster to 30% for new light vehicles and 20% for used ones in 2026 as younger buyers see less of a need to pay for another music service. This leads gross adds to drop to just under 34 million in total for the next five years versus 37.6 million in Morningstar's base case. The rise of music streaming also negatively impacts churn which rises back to 1.8% in 2026, equal to 2017. As a result, the firm only adds 500,000 net self-pay subscribers over the next five years and actually loses net subscribers in 2025 and 2026. In order to offset churn and a smaller funnel, management holds off on price increases and offers more discounts, leading to 2026 ARPU falling just short of the 2021 levels. This leads to average top-line growth of only 1% for satellite radio. On the gross margin, Morningstar assumes a contraction as the largest component remains at a fixed percentage of revenue. The firm will continue to spend on non-music programming, including sports rights that have a fixed dollar amount. As a result, gross margin declines to 59.9% in 2026 versus 62.2% in Morningstar's base case. Total gross profit over the projection period would be roughly $3.4 billion less than the base case. For Pandora, the service continues to lose ground against the larger music streaming services on both the ad-supported and subscriber sides. Ad-supported listening hours will fall by 7% a year to 8.0 billion in 2026, well below the 9.9 billion hours in Morningstar's base case. Ad RPM will fall by 4% on average as the firm finds it harder to hold pricing as listening hours drop off. Advertising revenue falls 10% annually to $686 million in 2026, 42% below 2021 and over 50% below Morningstar's base case. Due to an inferior offering, the subscriber side loses 750,000 net customers and ARPU remains flat as management tries to compete on price, leading to an average decline of 1% for subscriber revenue. Pandora's top line falls by 5% on average and the gross margin falls 27.1% as content costs do not contract as fast as revenue. Total revenue under Morningstar's "all wrong" scenario remains roughly flat over the next five years but the operating margin shrinks to 21.7%, leading to a fair value estimate of $3.75. [[Category:Thesis]] [[Category:Equities]] __INDEX__
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