Post by musicradio77 on Sept 15, 2005 10:42:42 GMT -5
Sirius Has Long-Term Distress Signal
The Stocks Under $10 Staff is Will Gabrielski and David Peltier.
Investors have long had a fascination with technology stocks, and the fast money that was made from them in the late '90s. That fascination still remains today, especially if the tech stock you're talking about is Sirius Satellite Radio.
We own Sirius in the Stocks Under $10 model portfolio and have a 12% gain at the current quote of $7.17. We believe shares have an attractive return potential from the current quote in the coming six months, thanks in part to its rapid subscriber growth and the pending 2006 launch of Howard Stern, the popular radio shock jock.
That said, we want to delve into some of Sirius' longer-term headwinds and look at why the company's somewhat passive response to our questions regarding competition and cash flow raise enough red flags to question the company's long-term viability.
Sirius' business model of offering commercial-free satellite radio services for a monthly subscription fee has generated the type of market valuations reminiscent of America Online in the dot-com era. In 1999, AOL was a rapidly growing company that was revolutionizing the world by offering a unique platform to access the Internet.
At its peak, AOL had about 30 million subscribers and was valued at $220 billion, and its stock traded at $95 a share. As it stands now, Sirius subscribers are being valued at about $3,500 each, or the same as the average cable subscriber, despite much lower monthly subscription fees.
The market evaluations for Sirius are overblown, similar to the way those of AOL were in 1999. Unfortunately, the similarities between Sirius and AOL do not stop there. For starters, Sirius was not willing to address the threat of competition when we raised the issue on a call with a company representative.
That's because the company believes high costs of entry in the radio space -- Sirius has accumulated a $1.9 blllion deficit to get to where it is today -- and difficulties dealing with the Federal Communications Commission will make it hard for new competitors or technologies to challenge Sirius. This type of arrogance within a corporate culture is alarming, especially for a company that has never turned a profit.
We delved a bit deeper into this question following the company's response and asked about competition from other non-regulated audio entertainment services such as Apple's iPod. The company representative said the iPod is inconsequential.
We beg to differ. The iPod and other portable music devices are, in fact, consequential. The iPod, which has been selling more than 5 million units per quarter, dwarfs Sirius' projected 3-million-subscriber base. We believe people with iPods will not be as likely to buy a portable satellite radio subscription, because the two products offer similar services in that they each provide the listener with unique programming. Every iPod sold has a negative effect on Sirius' addressable market.
Also, the same Sirius spokesman said that he expects Sirius to be a "cash cow" by 2007. In our view, this is a sign that management is not properly assessing or planning for the potential for higher subscriber acquisitions costs as competition between it and satellite radio rival XM (XMSR:Nasdaq - commentary - research - Cramer's Take) heats up and leads to higher advertising and content costs.
When we hear the words "cash cow," we think of a company like Microsoft, which can throw off tons of cash from operations with minimal investment. If Sirius management believes the company will be a cash cow one year from now, it is our view that the company is miscalculating the strength of free markets to create competitive threats that cut into margins and prevent monopolies.
We also believe much of Sirius' current $10.6 billion enterprise value is based on lofty expectations for Howard Stern's show, which is set to debut in January. The company has publicly stated that it needs 1 million subscribers in order to generate break-even results on a five-year $500 million outlay for Howard Stern. Taken at face value, this seems easily attainable, because Stern had upward of 6 million to 12 million steady listeners.
But these projections by Sirius are flawed at best. Sirius, on the basis of its low churn rate, estimates that the 1 million subscribers will have to stay on board an average of seven years with no increases to their monthly subscription rate. These are very vague forecasts that lack historical precedent; Sirius hasn't even been around for seven years. And the Stern deal, as it stands now, is only set to run five years.
Finally, we believe the satellite churn rate will be negatively affected by competition from other music services.
The bottom line is that you want to own Sirius for a trade. The company's short-term subscriber growth is impressive, and Howard Stern's January launch will create a lot of trade-worthy news.
But don't be fooled into believing Sirius will manage to dodge the laws of capitalism. Much like AOL, Sirius appears to be headed for a fall. After producing some nice short-term gains, Sirius will give back the profits over the long term.
The Stocks Under $10 Staff is Will Gabrielski and David Peltier.
Investors have long had a fascination with technology stocks, and the fast money that was made from them in the late '90s. That fascination still remains today, especially if the tech stock you're talking about is Sirius Satellite Radio.
We own Sirius in the Stocks Under $10 model portfolio and have a 12% gain at the current quote of $7.17. We believe shares have an attractive return potential from the current quote in the coming six months, thanks in part to its rapid subscriber growth and the pending 2006 launch of Howard Stern, the popular radio shock jock.
That said, we want to delve into some of Sirius' longer-term headwinds and look at why the company's somewhat passive response to our questions regarding competition and cash flow raise enough red flags to question the company's long-term viability.
Sirius' business model of offering commercial-free satellite radio services for a monthly subscription fee has generated the type of market valuations reminiscent of America Online in the dot-com era. In 1999, AOL was a rapidly growing company that was revolutionizing the world by offering a unique platform to access the Internet.
At its peak, AOL had about 30 million subscribers and was valued at $220 billion, and its stock traded at $95 a share. As it stands now, Sirius subscribers are being valued at about $3,500 each, or the same as the average cable subscriber, despite much lower monthly subscription fees.
The market evaluations for Sirius are overblown, similar to the way those of AOL were in 1999. Unfortunately, the similarities between Sirius and AOL do not stop there. For starters, Sirius was not willing to address the threat of competition when we raised the issue on a call with a company representative.
That's because the company believes high costs of entry in the radio space -- Sirius has accumulated a $1.9 blllion deficit to get to where it is today -- and difficulties dealing with the Federal Communications Commission will make it hard for new competitors or technologies to challenge Sirius. This type of arrogance within a corporate culture is alarming, especially for a company that has never turned a profit.
We delved a bit deeper into this question following the company's response and asked about competition from other non-regulated audio entertainment services such as Apple's iPod. The company representative said the iPod is inconsequential.
We beg to differ. The iPod and other portable music devices are, in fact, consequential. The iPod, which has been selling more than 5 million units per quarter, dwarfs Sirius' projected 3-million-subscriber base. We believe people with iPods will not be as likely to buy a portable satellite radio subscription, because the two products offer similar services in that they each provide the listener with unique programming. Every iPod sold has a negative effect on Sirius' addressable market.
Also, the same Sirius spokesman said that he expects Sirius to be a "cash cow" by 2007. In our view, this is a sign that management is not properly assessing or planning for the potential for higher subscriber acquisitions costs as competition between it and satellite radio rival XM (XMSR:Nasdaq - commentary - research - Cramer's Take) heats up and leads to higher advertising and content costs.
When we hear the words "cash cow," we think of a company like Microsoft, which can throw off tons of cash from operations with minimal investment. If Sirius management believes the company will be a cash cow one year from now, it is our view that the company is miscalculating the strength of free markets to create competitive threats that cut into margins and prevent monopolies.
We also believe much of Sirius' current $10.6 billion enterprise value is based on lofty expectations for Howard Stern's show, which is set to debut in January. The company has publicly stated that it needs 1 million subscribers in order to generate break-even results on a five-year $500 million outlay for Howard Stern. Taken at face value, this seems easily attainable, because Stern had upward of 6 million to 12 million steady listeners.
But these projections by Sirius are flawed at best. Sirius, on the basis of its low churn rate, estimates that the 1 million subscribers will have to stay on board an average of seven years with no increases to their monthly subscription rate. These are very vague forecasts that lack historical precedent; Sirius hasn't even been around for seven years. And the Stern deal, as it stands now, is only set to run five years.
Finally, we believe the satellite churn rate will be negatively affected by competition from other music services.
The bottom line is that you want to own Sirius for a trade. The company's short-term subscriber growth is impressive, and Howard Stern's January launch will create a lot of trade-worthy news.
But don't be fooled into believing Sirius will manage to dodge the laws of capitalism. Much like AOL, Sirius appears to be headed for a fall. After producing some nice short-term gains, Sirius will give back the profits over the long term.