Sirius XM Holdings Inc. (NASDAQ:SIRI) is a direct play on growth in the auto industry. Up until now, that has been a very consistent market with shipments reaching new highs every year. For the past decade, Sirius XM has been one of the only a la carte services associated with vehicles, giving new car buyers a test run followed by the option to subscribe.
And since Sirius XM has a long lasting relationship with the world’s biggest manufacturers, it also gained from used car sales when buyers wanted to upgrade.
However, for the first time, the auto market is changing rapidly. More and more people are electing to use ride-sharing platforms like Uber and Lyft in big cities versus owning or leasing a vehicle. What we are seeing is a direct correlation between the growth of Uber and struggles in the auto industry.
As a result, major manufacturers like General Motors Company (NYSE:GM) are being forced to innovate, and those changes put SIRI stock in real danger for the first time post-recession.
GM Changes Could Weigh on Sirius XM Stock
With new car sales for 2016 tracking about one million fewer than 2015, GM is making big changes to substitute the loss. The company wisely realizes that services like Uber and the diminishing need for car ownership is cutting into its top line.
General Motors now has an ownership interest in Lyft. As a result, GM is focused on advancing Lyft’s ride-sharing business. One way it plans to do so is by renting cars.
The fact is that the number of consumers who choose not to own vehicles is growing by record numbers each year. Back in 2014, there were a record 25% of vehicles leased as a percent of new car sales. That percent jumped to 28% last year and topped 30% this year. This data proves that consumers don’t want to be tied down by car ownership, and prefer the idea of paying to borrow. That’s what makes renting vehicles genius for GM.
The problem with renting is that consumers don’t actually own the vehicles, which means consumers won’t upgrade for Sirius XM services. Given the rate at which leases are growing, one must believe that GM’s renting program will be very successful, especially in metropolitan areas. Of course, it will be a while before the program reaches every city and it becomes mainstream.
GM will start by supplying 125 Chevrolet Equinox SUVs in Chicago and other major cities for Lyft drivers. GM will give Lyft drivers or applicants the option to rent, lease or own. Not only does this solve a growing problem of ride sharing applicants who are disqualified for transportation reasons, but also it allows GM to monetize the ride sharing industry.
GM will charge Lyft drivers $99 per week. Notably, that’s cheaper than what many pay to own or lease a brand new Equinox.
With that said, we already established that a consumer renting a car would not be a Sirius XM subscriber. What we don’t know is how many consumers will actually rent. We have to believe that the potential market is those who lease, or one-third of the new car sales market. Realistically, 10% of the consumers who currently lease could end up renting. This includes millennials who don’t currently lease or own and those with no or bad credit.
Even if that number translates to 10% of future GM units, that could be a big blow to Sirius XM stock and future subscriptions. It would significantly reduce Sirius’s addressable market, and even more so if the likes of Ford or Chrysler follow suit.
The Real SIRI Stock Kicker
General Motors’ move to renting vehicles is just one of many recent changes that could lower SIRI’s addressable market. Another is AT&T Inc.‘s (NYSE:T) connected car, where the company partnered with Ford Motor Company (NYSE:F) to put 10 million vehicles with 4G LTE on the road by 2020. This, of course, means that the car becomes a device, and consumers have access to the many music apps; Apple is already in the car too.
What all this means is that Sirius XM is no longer the only add-on service on the road. Therefore, success won’t come as easy.
When you consider that Sirius is expected to grow at a high single digit rate this year, and a mid-single digit rate next year, one could make a strong case that SIRI stock is already expensive at 23x forward earnings. Given all these things to come, not even Sirius stock bulls can deny there are some unknowns ahead. And for the first time, I don’t think SIRI stock makes it through without falling much lower.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.