BOSTON ( TheStreet) -- Sirius XM ( SIRI) shares may quadruple to as much as $8 in the next three years as the satellite-radio company adds subscribers without many new costs, says Craig Hodges of the Dallas-based Hodges Fund ( HDPMX).Hodges says Sirius, which reports second-quarter financial results Tuesday, could follow a similar trajectory as footwear maker Crocs ( CROX) and clothing and accessories company Fossil ( FOSL), which attract a similar rabid fan base of investors. Crocs shares are up more than 840% since the financial crisis took hold in late 2008, and Fossil shares have rallied 400% over that same time.
One of the main reasons Hodges believes Sirius XM could triple or quadruple in price is that the company is small but "they can add subscribers without adding costs. They have incredible economies of scale, which is the beauty of it," Hodges says. The largest source of new subscribers for Sirius XM is new installations in cars manufactured by General Motors ( GM) and Ford ( F), among others. Free trials are given to car buyers and Sirius XM attempts to convert those trials over to paying subscriptions. In Sirius XM's first-quarter report, subscribers totaled 20.6 million and the conversation rate of trial subscribers was a weak 44.7%. By comparison, Sirius XM ended last year with 20.2 million subscribers and a conversion rate of 45.1%. Hodges argues that the conversation rate could perk up if Sirius XM can make inroads into the used-car market. "That's a big catalyst," he says. "They do have a deal to get into the used-auto market, which is three times the size of the new-auto market." The subscription business model and the close ties to the auto industry allow Hodges to brush off fears of increased competition for Sirius XM. The company doesn't have a rival in the satellite-radio space, but has faced competitive pressure from Pandora Media ( P) and other free music sites, as well as portable music players like the Apple ( AAPL) iPod and iPhone. "There's been a lot of talk of increased competition, but I think those are very overblown," Hodges says. "I don't think that will be long-term competition for Sirius XM. There is a lot of functionality with Pandora that does not work. There are a lot of things Pandora would need to change to be accepted more." When asked if he views the advertising model Pandora employs as inferior to Sirius XM's subscription model, Hodge says that he "would agree with that whole-heartedly. When you look at the big picture, after the combination of Sirius and XM, they've cut costs. They've found synergies. And as they get to a bigger number of subscribers, more and more that goes to the bottom line." While Hodges still holds on to a few million shares of Sirius XM in hopes it will triple or quadruple as he expects in a few years, he's content knowing that he has exposure to a company that is growing revenue by 8% to 10% now while earnings before interest, taxes, depreciation and amortization, or EBITDA, is growing by almost 20%. "If you're a short-term player, it's not an expensive stock," Hodges says. "It's not cheap, but if they can continue to grow EBITDA at 20%, I wouldn't say it's overpriced." -- Written by Robert Holmes in Boston. >To contact the writer of this article, click here: Robert Holmes. >To follow Robert Holmes on Twitter, go to http://twitter.com/RobTheStreet. >To submit a news tip, send an email to: email@example.com.