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Why Sirius XM Is Going Stratospheric

Sirius XM (SIRI) has long been the playground of day-traders and aggressive investors who like “cheap” stocks, so it’s easy for some on Wall Street to laugh off volatility as a function of its fad status.

But after Sirius earnings blew the doors off, it’s clear SIRI stock is no laughing matter — and that the gains may stick as the satellite radio company moves ever higher.

Sirius earnings details showed record revenue of $940 million in the second quarter, up 12% from $838 million in 2012. Net income for Q2 is trickier. The headline number was down to $126 million compared with $3.1 billion in the year-ago period, but when you back out a $3 billion one-time tax benefit that boosted results, adjusted earnings were up 47%.

There’s a lot to like in this report — a decent revenue beat, on-target EPS, 25 million total subscribers in total after adding 715,000 this quarter, double-digit growth in revenue for the sixth consecutive quarter and continued profitability despite some capital intensive upgrades.

Sirius XM earnings help justify the roughly 30% run year-to-date in 2013 and the 75% gains in the last year for or so. But what about the future?

After all, streaming radio services like Pandora (P) continue to gain traction and the big dogs in tech — namely Apple (AAPL) with its iTunes and “iOS in the Car,” and Amazon (AMZN) with its extensive digital video and music offerings — are surely trying to figure out a way to squeeze Sirius out of the market altogether as they own the entire American entertainment experience.

Well there’s good news there, too.

Consider the following chart that overlays Sirius XM stock (the blue line) vs. U.S. vehicle sales (red line).

vehicle sales

There’s a clear trend here — partially because vehicle sales and durable goods broadly are a measure of the economy, and the entire stock market has risen in the same frame. But also because new vehicles come with satellite radio a lot of the time, and are often a consumer’s first point of contact with Sirius XM.

In other words, strong sales at Ford (F) and General Motors (GM) lately mean a strong marketing push for Sirius XM as car buyers experience the product and get trial offers with their new wheels.

I’m not saying the volatility won’t continue after Sirius earnings. But there’s a lot of optimism surrounding the stock with these strong subscriber numbers and revenue growth, and the fact that the stock is at an all-time high proves that this isn’t just a swing-trade trend.

Whether SIRI can keep this up long-term in the face of competition from streaming radio and tech blue chips is an open question. But it appears that for the time being, SIRI stock is here to stay.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here

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