Investing in Sirius XM Satellite
Today's Financial News - Posted April 2, 2009
Analyzing the profit potential of a highly volatile penny stock.
by Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): It is one of the most closely watched stocks. It shares are traded some sixty million times each day.
It is a favorite of speculative investors, some of whom have racked up gains of gains of 300% or more over the past two months.
But the same company is near the top of short-selling lists, home to an incredibly large population of “shorts” (171 million shares), eagerly waiting for the stock to wither and die.
Over the past decade, short sellers have profited handsomely as shares plummeted from a high of $60 to a February 11, 2009 low of just $0.05.
Shares of Sirius XM Radio (NASDAQ:SIRI) are nothing if they are not volatile.
Out of the stocks I cover, Sirius is the most hotly contested. Just as the radio provider’s unofficial mascot, Howard Stern, has an army of dedicated fans and an equally large legion of detractors, so does the company’s stock.
Investing in Sirius is like joining an all-out war between shorts and longs.
Recruiting new investors
Over the last several years, many battles have been waged. There was the XM merger, the FCC debate, paying incredible amounts for radio talent, and most recently a major bankruptcy scare.
So far, as evidenced by a share price that has dropped by as much as 99.91%, the shorts are in the lead.
But will it continue?
Investors need to be aware of three major factors impacting the financial future of this company: its debt burden, its subscriber turnover and the threats from a wide array of competitors.
While critics and analysts constantly point to the company’s high-priced talent contracts, it will be one these three elements mentioned above that brings Sirius investors to their knees… if it ever happens. Over-paid talent will merely complicate the situation.
Earlier this year, Sirius and its love-him-or-hate-him CEO, Mel Karmazin, were just hours away from heading to bankruptcy court. With close to a billion dollars in debt due throughout 2009 and only a fraction of the liquidity needed to make the payments, Sirius’ future was in jeopardy.
But then came John Malone and his Liberty Media (NASDAQ:LINTA). When Malone stepped in with a $530 million investment, the debt troubles of 2009 were solved. Now they are the debt problems of the future.
Unless the company can soon record its first annual profit, soaring debt levels will be a recurring theme.
Malone’s investment came at a relatively high price. His company, which owns DirecTV, will receive two seats on Sirius’ board and will be given 12.5 million shares of new preferred stock, convertible into 40% of common stock along with a 15% interest rate. In all, the rescue package will cost Sirius more than $70 million in annual financing fees.
While the payouts are in the form of two separate tranches – $280 million to pay off near-term debts and operating costs, and $250 million to pay off debt related to XM Satellite – the deal does not fully mature until 2012.
But that date may not matter as there is great speculation and debate as to what Sirius and its market will look like just three short years away.
Competitive threats
As mentioned above, competition is going to be a very important factor as Sirius crawls toward profitability. The company managed to merge with its only other satellite-based competitor, XM Satellite Radio, but as new technology is developed, competitors are threatening to erode the combined company’s share of the market. 
Of course, traditional so-called “terrestrial” radio outlets remain Sirius’ largest competitive threat.
Pundits rightfully ask, “Why pay for radio when you can get it for free?” It is an important question that Sirius tries to answer through its ad-free channels and unique programming.
A bitter recession is hampering the company’s efforts to draw subscribers. With packages ranging from $6.99 per month to $19.99 per month, Sirius’ services are fairly inexpensive when compared to monthly cell phone plans, cable bills and Internet-access fees.
But when budgets get tight, the company is quickly realizing one of the first expenses cut is Sirius’ subscriptions. After all, “Why pay when you can get it for free?”
But traditional radios are not the only major competitive threat. Technology like Apple’s (NASDAQ:AAPL) iPod and iPhone are giving listeners access to huge arrays of customized music selections.
Granted, Sirius is ready to release its own “app” for Apple’s products that will give the company access to a base of nearly 30 million potential subscribers. Even with the step into a new market, the Apple application will likely not be enticing enough to draw the kind of new subscriber base Sirius needs to find profitability and a long-term solution to its debt.
Apple already provides a host of applications that offer similar listening and entertainment options. One significant competitive advantage Sirius has over these threats is its ability to offer exclusive broadcasts from Major League Baseball, NASCAR, Martha Stewart, Oprah and of course, Howard Stern.
With the exception of Mr. Stern’s unique talent and broadcasts, relatively few subscribers have shown a willingness to pay monthly fees to gain access to this programming, especially as exclusivity deals erode and similar programming becomes available through competing mediums.
Detroit’s trickle-down effect
Finally, the nation’s auto industry will play a large role in Sirius’ long-term success. The company’s current business model depends on converting the temporary, free subscriptions offered in new cars to bring new long-term subscribers to its rosters.
So far, it has been moderately successful, at best. In 2008, just 44% of those listeners were converted to full subscriptions, versus 51% in 2007.
With nearly half of all “introductory” subscribers opting not to renew their subscriptions when the bill arrives, there is a glut of un-activated Sirius-enabled radios in the marketplace. Estimates put the figure above the 40 million mark, meaning there are nearly twice as many un-activated radios out there than current subscribers.
This will be an important factor going forward. The glut of unused radios could be used to offer free, advertising-based Sirius programming or these units could re-activated in another promotional attempt. Investors should note that this could add a quick boost to subscriber roles (with low variable costs), but will likely have little impact on short-term revenue outlooks.
Overall, the problems plaguing the Big Three will be very detrimental to Sirius. As new-car sales plummet, Sirius will have that much less exposure to potential new subscribers. In March, Ford (NYSE:F) and General Motors (NYSE:GM) saw sales declines of more than 40%.
Sirius investors must be willing to see similar numbers reflected in the company’s subscription conversion rates.
Growing pains
The company’s pro forma subscriber activity figures for 2009 give potential investors a snapshot of what kind of growth to suspect over the next year.
The company started the year with 17.3 million subscribers. Throughout 2008, it managed to enroll 7.7 million new subscribers, but during the same time 6.06 million subscriptions were canceled.
In all, Sirius finished the year with 19 million subscribers (9.5% annual growth) – well short of Karmazin’s goal.
The previous years showed much stronger growth. In 2007, net subscriber growth was recorded at 27%. In 2006, the figure was 47.6%. Investing in the company is an indication you feel the downward trend will soon stop.
The company’s financial figures yield similar results. From 2006 to 2007, revenues grew by 31%. From 2007 to 2008, that figure was just 18%.
That trend will continue unless Sirius can find a way to boost subscriber roles and the market’s willingness to pay for a service that is constantly under attack from similar services available without a charge.
The fundamental outlook for Sirius is bleak. Subscription growth rates are falling. Revenues are on the decline. Competitors are knocking away the company’s foundation one brick at a time. And long-term debt problems remain a quiet crisis.
Even so, investors do have a potential to profit from a stake in the company. But they must be fast movers and extremely cautious, as Sirius is a highly speculative and volatile company.
Gambling vs. Investing
By taking a long position in Sirius, you are taking a gamble that the market’s predictions are wrong. You are betting that the competitive threats are overdone, the company will find a solution to its debt problems and subscriber trends will mark a turnaround.
If any one of these events happens in a dramatic fashion, investors getting in at current prices will realize a profit, potentially a significant profit. 
By taking a short position, on the other hand, you believe the market is over ambitious and massive share dilution and current trends will push the stock price even lower.
Even with a current share price well below a dollar, there is plenty of room for prices to fall. If the anticipated reverse split is realized, short pressure will grow, even if for only psychological reasons.
Short investors must be aware that a reinstatement of the uptick rule could give share price a sudden, but likely brief-lived surge.
Over the last few months, analysts have backed away from Sirius, saying the stock is not reactive to fundamental or material changes and is more of a gamble than an investment. With the company’s debt problems temporarily solved, their concerns have been somewhat mitigated.
It is important, however, for investors to realize Sirius is a highly speculative play, not a legacy-style investment. It should be considered a high-risk stock, open only to investors that can afford to lose their principal.
In conclusion, Sirius has many major fundamental hurdles in front of it. It recently squeaked by a potential bankruptcy filing, but in turn forced its investors to accept major dilution and the loss of a 40% stake in the company. There are many threats affecting the company’s outlook, but they can be overcome with strong management and a swift economic turnaround.
Investors aware of the volatility should weigh the threats and take an appropriate position. Current valuations and threats warrant a short position. But short-term investors, with the ability to trade quickly, will have profit opportunities by taking a long position.
My official outlook for Sirius XM Radio (NASDAQ:SIRI) is negative.
Andrew Snyder is the chief investment strategist for TodaysFinancialNews.com. He specializes in volatile trading strategies and is the editor of TFN Strategic Trader, a popular options trading research service. He can be reached at memberservices [at] todaysfinancialnews [dot] com.
Disclosure: Andrew Snyder has no position in Sirius Xm Radio
Next Article: Some political smoke for the mirrors
Posted by Andrew Snyder · Filed Under Featuring..., Oil and Energy, US Stocks and Markets
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April 2nd, 2009 at 5:54 pm
I follow this stock closely and own shares. I think you missed some key points. No question they have some negatives. But there are many positives. They are in 70-80% of new cars vs. 40-50% just a short time back. What will they do if we get back to 16 million sold? No one has their content in one place for such a cheap price. They also have NFL, college sports and a lot more than you mentioned. Internet expands their reach far beyond their satellites. Globally, I would think. A lot of their detractors have a built in bias and have been proven wrong about the merger and the backruptcy. They compete with television for me. I can listen and be productive at the same time. I think a vast future market may exist for the millions of vehicles that are non-subscribers. For quality programming, that is free, but has minimal commercials, say 5-10 minutes per hour.
April 2nd, 2009 at 6:13 pm
Here’s what I don’t understand about this article (and the few that seem to come out EVERY month since the moment Sirius signed Howard Stern):
1. Sirius/XM radios are not strictly in AMERICAN cars. They are offered in one of the top 2 car companies in the world – Honda/Acura.
2. Revenues are down from the prior quarter, this is true, but they are still making MORE money than they did the year before. Their growth was HUGE over the last two years and you point out that the growth is not as fast or large as before? This holds true to most products when they are first introduced on the market – Wii’s, Razor scooters – etc. The difference between this product and those is subscriptions.
3. While I don’t like paying the extra few dollars a month, their new internet fee may indeed make them more money this quarter.
4. Those other competitive products have existed for some time, and in the case of the internet music sites, they are in dire financial shape themselves (see Pandora) and are planning to become fee for service also.
5. Howard, Howard and Howard. Until he is done with his contract, don’t underestimate his value. HUGE.
April 2nd, 2009 at 7:23 pm
Well Andrew this article shows you at least thought before typing. I may not agree with the conclusion, but at least this is not just a hit piece. You have stepped up your research and deserve credit for taking the time to present you case with reason rather than emotion.
The downside risk seems well mitigated in my mind, since Malone and Liberty will not risk their investment, and if Q1 numbers show continued revenue growth and reduced expenses SIRI will be well on its way to a real healing.
April 3rd, 2009 at 8:56 am
Outlooks like these are always depressing. The short story is, is that SIRI is so cheap that you don’t need to invest your life savings to make some good returns. Even if you had only invested a couple of hundred dollars back when Sirius was at .5 you have already made more then most banks would haven given you on a savings account or CD in way less the time. Making a couple hundred dollars to invest is pretty easy these days even with the current economy. The problem with todays investing minds is that you need huge amounts of money to make any money. How can anyone complain about any amount of free money no matter how much it is? Lets all keep in mind that how well a stock does is up to the investor. I swear that the only reason some of these stocks are not doing bad is because the investor doesn’t want them to do good. I mean banks like Citi? Come on, take a good look and realize that they are not going out of business and that the government doesn’t want them. All the negative talk about this stock and that one it is really taking a toll on peoples minds and effecting the outlook of the stock market in general.
April 18th, 2009 at 11:25 am
Well something big happened yesterday when over 155 million shares were traded, when usual volume was daily, 33 million! Price also closed at .50, a price I think is hugely bullish, as I think that was a resistance point.