It is important for Sirius XM Radio Inc (NASDAQ:SIRI) to expand its telematic service offerings due to the fact that the auto-based telematics market in the United States is poised to grow by ~20 percent annually. In 2012 alone, the U.S. auto-based telematics market generated $2 billion revenue, and it is estimated to grow to approximately $6 billion by 2018.
According to Jason Basinet, analyst at Citi Research Equities, although telematics is significant for Sirius XM Radio Inc (NASDAQ:SIRI), it is unlikely for the company to initiate a transformative acquisition because of three reasons.
At this year's SALT New York conference, Jean Hynes, the CEO of Wellington Management, took to the stage to discuss the role of active management in today's investment environment. Hynes succeeded Brendan Swords as the CEO of Wellington at the end of June after nearly 30 years at the firm. Wellington is one of the Read More
Basinet believed one obstacle is the large purchase, around $1.4 billion (price paid by Verizon to Hughes) to $ $5.5 billion (estimated price of Onstar). The second reason is the size of the M&A, which could dilute the FCF per share of the company, and the third is the possibility that Sirius XM Radio Inc (NASDAQ:SIRI) could become a defacto telematic firm for OEMs after winning a contract with Nissan as its exclusive provider of telematic service.
The analyst expects Sirius XM Radio Inc (NASDAQ:SIRI) to invest in the telematic segment to fill in missing capabilities through organic investments augmented by targeted, low-cost acquisitions instead of a transformative acquisition.
Currently, Sirius XM Radio is offering two-way telematic services (weather and traffic) to consumers of most auto companies. Its contract with Nissan showed that the company has a strong relationship with OEMs despite of its lack of two-way capability.
Basinet noted that at present, no firm dominates the telematic market except Onstar, which is used by General Motors Company (NYSE:GM) and captures 50 percent of the market. The remaining market share is divided among Hughes Telematics and Agero.
He believed that the recent decline in the stock price of Sirius XM Radio Inc (NASDAQ:SIRI) was caused by fears of investors over transformative telematic M&A. Basinet emphasized that the sell off is unwarranted because the addressable market (telematics) for Sirius is poised to expand.
He also pointed out that the Nissan Motor Co., Ltd. (PINK:NSANY)’s win suggests that Sirius may become a key OEM supplier of telematics services over time.
Basinet maintained his buy rating and $3.60 price target for the shares of Sirius XM Radio Inc (NASDAQ:SIRI). The stock price of the company is up by nearly 2 percent to $3.11 per share around 1:09 in the afternoon in New York on Wednesday, April 10.