Why oh why everyone is so fascinated with XM Satellite Radio Holdings (ticker: XMSR) and Sirius Satellite Radio (ticker: SIRI) is beyond me. After being propped up by hopeful souls for a long time, it's nice to see that at the very least the two are starting to come down a bit in price (for the last twelve months XMSR is down 55% and SIRI is down 27%), but I think they still have a long way to go. Here are two companies delivering a product that people want - as evidenced by Sirius' 300%+ compound annual growth from '03 to '05 - but just can't seem to get their operating model to where they can bring home a profit for their shareholders.
So what's holding these two back? Getting and keeping customers. Though revenue has been growing at a breakneck pace, so has customer acquisition costs: in the first quarter of 2006 Sirius spent an impressive 94% of their revenue on customer acquisitions! XM doesn't break it out quite as nicely as Sirius, but their "subsidies & distribution" (basically offering free services and marking down merchandise) has been growing around 70% per year. Are these guys just competing with each other too hard or are people really not all that interested in satellite radio unless someone gives them an unbelievable (and unprofitable for the company) deal?
As far as I can tell, it looks like a lot of institutional support has moved away from these two, but there is still obviously support out there as they are trading at very high multiples of price to sales and price to book value. And this support is in the face of some solid pressure from short sellers - according to Yahoo!Finance XMSR has nearly 16% of outstanding shares shorted, while SIRI has about 9%. Even worse for shareholders, as these guys continue to blow through cash they are hammering their shareholders by issuing lots of debt and issuing shares. Right now, both companies have over $1B of debt on their books and SIRI has sold an additional $650m worth of stock over the past three years.
These guys need to do something and do it fast. I don't know whether it's to completely restructure or to pursue a combination for the two companies (heck, at least they wouldn't have to compete with each other), but, at least according to current analyst estimates, the way things stand right now positive profits are still no where in sight.
For readers that own these stocks, please feel free to email me, give me a reason why you think there's hope for these stocks. Give me something! But also consider this: psychological research has shown that investors have a distinct tendency to hold onto losing investments hoping for a comeback while being more comfortable selling off investments that have made them money. The key in investing is to really keep a cap on your losses so that your winners can have an effect on your bottom line. So think hard about SIRI and XMSR and where they are right now (regardless of where you bought them), if you really think that there's good reason that the stock price should come back then great, hold on to them. If not, dump the dogs and find something that has some real meat to it.
Just remember, in the stock market what goes down does not always come back up.
-AvgJoe
Technorati tags: SIRI, XMSR, Sirius, XM, satellite
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8 comments:
why
When you look at XM and Sirius you have to look to the future, if you don't you'll miss the whole point. OEM installations are everything, looking at the fact that GM and Honda alone will have 1.5 million XM radios installed this year is just the beginning. We saw some artificial growth in 2005 which hurt both companies but with Hyundai adding 550k cars to the mix next year for XM and Audi and VW are going exclusive for Siri we know tha more cars will have more satellite installs.
Its only been a year and a half since these companies have become viable products. Considering they are relying on subscription based income we have to let them swim for a little bit. XM grew around 100% last year by essentially buying their customers. The subscribers will pay for the gross addition cost but you have to wait, they are only worth 12.95/month and people don't seem to understand that. When growth slows, profit will rise (or exist in this case).
Technology is the other side of it. The INNO is sat radios greatest invention right now. There is nothing else like it and again remember we are only in the incubation stages of this industry. Possibility's of Video, GPS navigation are all there. I heard at an auto show earlier in the year XM had a spec car with an XM version Lojack car tracer device. The possibilities are endless which keeps my motivation there. If it was "just" radio that was nationwide I would have walked away quite a while ago.
So these are all valid points to consider when looking at XM and Siri. I remember in the late eighties when internet services were first catching on. It took AOL a few years but they peaked with 34million subs. In 2008 there will be 2 more satellite radio licenses granted. One speculative thing to look at is the possibility of a merger. Stern, NFL,MLB,NBA,Oprah,Martha,Ellen,Opie and Anthony etc etc..
I hear you on the future, but I just can't see how these are good stocks right now. How do the companies catch up to the stocks' valuations? Where's the room for appreciation?
I think that one has to work through those questions and what the cost of capital (ie the cost of having your money parked in XMSR or SIRI versus having it somewhere else) is in the meantime. I don't doubt that satellite radio could become a viable business in the future, but I do doubt that there will be a good outcome for current holders of XM and Sirius stock.
-Joe
I don’t know if you like music or have even listened to the radio lately, but terrestrial radio is terrible.
The music quality and selection on satellite radio is so much better than terrestrial radio.
True, you could rip mp3 from the internet, or buy your own music and listen to an ipod or mp3 player, but there is no way to find new groups or new music by buying or downloading your own music.
Of the few people who I currently know with sattelite radio, not one of them is willing to give up it up.
It is true that HD radio being broadcast, but who wants to pay large amounts of money out for equipment to listen to twenty minutes of commercials in High Definition.
I love satellite!
Just my $0.02
To answer your question I absolutely love music! Can't get enough. Plus, I have a 40 minute commute to work each way, so I think that makes me just about the ideal satellite radio customer. Problem is that I had XM for about six months and let it go. Personally, I found the music selection to be poor (imagine that with so many stations!) and the talk radio had commercials like terrestrial radio. So the $12/mo or whatever it is was just too much for me to stomach. The magic of Podcasts for radio shows is great for a daily commute and, for new music, online destinations like Pandora's awesome site (www.pandora.com) or Yahoo!Launch give me more than enough. But that's just my personal experience and neither here nor there.
Getting back to the point of whether XM and Sirius are good investments, well it's again the case of "anything is a good investment at the right price and nothing is a good investment at the wrong price." Loving satellite radio and thinking that it's a great product isn't enough here - the price levels that the stocks have been bid up to are going to prevent any current investors from seeing decent returns for some time to come.
So keep your XM or Sirius radio and, by all means, sing its praises, but there are many other stocks out there that are going to out perform both of these.
Joe
I agree with you 100%. These satellite radios are just a fad. Although they are growing a lot now, they will become saturated much sooner than they will become profitable. Lots of people prefer local radio, because of the local news/talk they offer. These people will NEVER subscribe to satellite radio. I predict that both SIRI and XMSR will eventually go bankrupt as investment bankers will not offer to buy more (worthless) stock from them.
Great points on XMSR and SIRI's future. But you haven't hit it on the mark.
SIRI doesn't have the issues XM has, and SIRI has found strong support around the 4 dollar level. Techincally, SIRI is strong and bound to move up.
A good reference is here,
http://www.investorsblog.net/post/index/178/Revisiting-SIRI-and-XMSR-again
XMSR, who knows? The stock is probably heading towards 10. Any thoughts?
I generally like to use technicals in conjunction with fundamentals, and so if the fundamentals just aren't there (like w/ SIRI and XMSR) it's tough for me to put too much weight on the tech signals.
I would warn, however, that SIRI looks like it could be on the upshot of a down trend and may see resistance on the 50 day MA. Just a non-techy's take.
Joe
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