Sirius XM (SIRI) recently reported its second-quarter 2012 financial results and, as expected, it added close to 622,000 net subscribers -- taking its total subscriber base to 22.9 million.

The healthy subscriber gains were backed by growth in auto sales during the quarter and a stable new vehicle conversion rate of 45%. For 2012, the company expects to gain close to 1.6 million net subscribers and earn $3.4 billion in revenues.

Also important to note is that while revenue sharing and royalty costs increased (as proportion of revenues), the company leveraged its growing subscriber base to bring fixed costs down (as percentage of revenues).

 

Given that Sirius XM is heavily dependent on the automotive channel, the number of automotive subscribers is the prime stock driver. We have already established that this metric is performing well so far. Even though Ford (F) and GM (GM) sales were down in July, overall vehicle sales increased as other car manufacturers are doing well. Thankfully, Sirius XM has relationships with several car manufacturers, which diversifies its risk to some extent.

Sirius XM has stated that the auto sales outlook for the latter half of 2012 is lukewarm, but it feels confident to reach its guidance of 1.6 million net additions.

Although Sirius XM is currently a popular choice for vehicle owners, it faces some threats in the future from radio services, such as Pandora (P) and Clear Channel Radio, with their enhanced personalized service that looks to push further into the automotive market. Over time, services like Spotify and potentially Apple (AAPL) will also try to establish their presence in in-vehicle systems.

To mitigate these risks, Sirius XM is expanding its product features. While its subscription model allows it to bring unique content like Howard Stern and NFL broadcast to its listeners, the radio company is also launching on-demand service for iOS and Android users. To add to this, Sirius XM will also launch personalized radio service by the end of this year, thereby combating Pandora.

The company is effectively employing a strategy that combines satellite and Internet media. It seems to have done fairly well from the cost perspective this quarter, but there is a limit to which the subscriber base can be leveraged. Revenue-sharing and royalty costs are variable and are likely to grow because of a periodic increase in royalty rates by the governing body.

We are in the process of updating our pricing model for Sirius XM and will have an update ready soon.

Our price estimate for Sirius XM stands at $2.32, roughly in-line with the market price.