Is Sirius XM's Next Stop $3?

Analyst price targets are inching higher for Sirius XM Radio (NAS: SIRI) .

Barrington Research's James Goss issued a new report on the satellite radio giant yesterday, offering up a $3 price target for 2012.

Yes, it's time to begin thinking of the satellite radio giant approaching the $3 mark for the first time in nearly four years. After closing at or above $2 for five consecutive trading days, a strong quarterly report early next month may finally establish a floor for what has been one of the market's most volatile -- yet ultimately rewarding -- investments since the market bottomed out three years ago.

Goss arrives at a $3 target by using a multiple of 25 times his enterprise value to EBITDA ratio for 2012. It's a steep multiple for a media provider, but Sirius XM's unique position and its ability to control content give it some serious upside with its scalable model.

Content is a con tent
What would happen to DIRECTV (NYS: DTV) if it should ever lose its NFL Sunday Ticket deal? Subscriptions would take a hit, because it's the one thing that makes the leading cable television service distinctive. Every other pay TV provider has to settle for the incomplete Red Zone gridiron coverage. DIRECTV recently renewed the deal at a hefty price tag, because it knew that hungry rivals would jump at the gig.

It's a different world for Sirius XM. The Sirius half of its service has a deal with the NFL, but it's not as if the pro football league can pit a renewal there against another premium radio service. It obviously can't expect XM to outbid Sirius since the two companies merged nearly four years ago. Sirius XM lives on if the NFL refuses its terms, and the subscriber hit probably wouldn't be all that great.

Sirius XM is probably the only premium media provider where content costs actually have declined over the past year. Compare that to cable and satellite television companies that face escalating contracts with networks and broadcasters.

That's $14.49 to you now
Keeping costs in check is just one part of the margin-widening equation. Getting customers to pay more -- for what is actually costing Sirius XM less -- is the real challenge.

Sirius XM revealed several months ago that it would kick in a 12% price hike early this year. Instead of $12.95 a month for the basic satellite radio service, subscribers will pay $14.49 a month. Without a whole lot of fanfare, the Sirius XM website is now showing $14.49 as its price.

Will the higher rate get in the way of the company's accelerating growth? Sirius XM did manage to close out 2011 with a better-than-expected 1.7 million pop in net subscriber growth. How well will Sirius XM fare in getting new users to sign up at the higher price? How effective will it be in getting existing subscribers to buy into the new rate at their next renewal milestone?

Sirius XM was having no problem growing its profitability under the same rates that it has been charging for years. This is a scalable model where high fixed costs and low variable costs make every new subscriber more lucrative than the one before.

Price hikes obviously aren't popular with consumers. Netflix (NAS: NFLX) learned that the hard way, seeing 800,000 net stateside customers defect in last year's third quarter after some of them were to be subject to an increase of as much as 60%. Few will argue that a 12% increase is outrageous, especially for a service that has been glued to $12.95 a month since Sirius' inception.

Threats have been vanquished
Naysayers have been saying that satellite radio merely will be a transitory technology, bridging the gap between the limits of terrestrial radio and the open-ended nature of streaming.

Well, what if streaming and satellite radio can peacefully coexist?

This isn't a hypothetical situation.

Ford (NYS: F) revealed earlier this week that it has sold 4 million cars with SYNC, the automaker's voice-controlled dashboard technology that allows smartphone owners to stream Web content or songs on their devices. Sirius XM is still growing.

Pandora (NYS: P) revealed this week that it's adding Acura and Kia to the growing list of partners that make Pandora streaming accessible in cars. It now has more than 125 million registered users, with the average listener streaming 18 hours of music a month. Sirius XM is still growing.

In other words, the competition has arrived, but the market is expanding to the point where every worthy player can be a winner.

The road up to $3 won't be steady or a quick ascent, but the pieces are falling in place for Goss' target price to happen eventually.

Sirius' trophy wife XM was once a recommendation in the Rule Breakers newsletter service. The growth stock service has identified ahot new multi-bagger. You don't need a subscription to check out the free report, but it won't be around forever socheck it out now.

At the time this article was published Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story except for Netflix. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.The Motley Fool owns shares of Ford Motor.Motley Fool newsletter serviceshave recommended buying shares of Ford Motor and Netflix.Motley Fool newsletter serviceshave recommended creating a synthetic long position in Ford Motor. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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