Should Investors Buy Sirius XM's Cloudy Future?
Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Trying to understand the future of satellite radio giant Sirius XM (NASDAQ: SIRI) has become more of a challenge today than at any point in its history. That’s because what lies ahead is now outside of its control. Today, its fate is in the hands of John Malone, chairman of Liberty Media (NASDAQ: STRZA), which is in a heated battle to take over the company. However, Liberty’s camp has come to realize that Sirius has no intention of making that fight easy.
Investors have every right to be frustrated. In fairness, Sirius has not gotten what it deserves. Despite a challenging economy and all of the distraction with not only Liberty, but also insider sales, the company has demonstrated impressive operating execution. The second quarter was by far Sirius’ strongest in recent memory – growing subscribers by 38% year over year as it added 622,000 during the three-month period. Even more impressively, its most important revenue component -- self-paying subscribers -- surged 28% to 463,000.
In addition to its strong subscriber growth, the company was able to stabilize its churn rate, even though it recently raised prices. Even more impressively, Sirius was then able to increase both revenue and EBITDA guidance. This exceptional performance should have signaled to Wall Street that there is yet value in the model. What should have been a celebrated quarter was only offset by its prevailing uncertainty.
What’s more, it’s now become a foregone conclusion that the company’s CEO, Mel Karmazin may not return after his contract expires in December. Who will take over? Liberty has made it known that although it considers Karmazin extremely valuable to the company, he’s not irreplaceable. In fact, Liberty’s CEO, Greg Maffei has said publicly that there are plenty of people that can do the job. Does that mean he already has someone in mind? It’s hard to imagine that conversations with potential suitors have not already begun which only adds more uncertainty to the mix.
Are Maffei and Liberty correct in their tactics, or in their perceived indifference about Karmazin’s status? How are they assessing Karmazin’s record, and does that play a role into their decision? Or does the fiasco surrounding Karmazin’s compensation and what he thinks he’s worth suggest that his ego can’t coexist with those at Liberty? After all, Karmazin did say that he could not work for anyone else. Was that a preemptive strike, issued upon knowing that he would be gone anyway?
Regardless of how one feels about the situation, Wall Street does not like it. It's hard to imagine that the stock can appreciate before all of this clears up, regardless of how well the company performs this quarter or the next. Making the situation more murky is now the unknown about where the future of its competitors are heading as there is now rumor that tech giant Apple (NASDAQ: AAPL) plans to enter the realm of music streaming.
Apple has reportedly contacted record labels and laid out plans to compete with (among others) Pandora (NYSE: P) – whose stock dropped by almost 17% when investors caught wind of the possibility. Should that concern Sirius investors? If it isn’t, then we are not paying enough attention to what Apple has been able to do with music. Though Apple may not be considered an immediate threat to Sirius, it’s hard to imagine that Apple will enter any market and be content with second place.
Unlike Pandora, which is able to grow through internet subscriptions as well as those initiated from smartphone apps, Sirius’ primary source of revenue and growth comes from auto sales. To that end, it places a considerable amount of focus on increasing factory installation of radios in new vehicles, while also looking for ways to reactivate those in pre-owned models. Currently, the company has enlisted approximately 6,000 U.S. auto dealers in a program that offers a free three-month subscription to used car shoppers.
But can it compete with Apple if the company decides to leverage its popular mobile devices such as iPhones, iPods and iPads to stream users’ existing playlists inside their vehicles – all from its iCloud? Will there be an auto market let for Sirius to strive to grow? I think these important questions are not yet priced into the stock.
But then again, it’s really hard to understand at this point what is priced in, considering that Liberty has been the one buying over the past three months. Investors have to remember that since hitting an intra-day low of $1.80 on June 25, Sirius's stock has surged to as high as $2.64. In fact, not many equities have outperformed Sirius during that span. But we’ve come to know that Liberty has had a lot to do with this recent buying; it now holds just less than 50% ownership of Sirius’ stock.
If you couple Liberty’s buys with some possible short-covering, it is hard to be impressed with what the stock has done. Though Sirius shares have appreciated by almost 50% over the past three months, I don’t think anyone can say with a straight face that the growth has been organic. The market clearly understands this. But will these gains hold up? Those who are still holding are betting that it will. But is it the right thing to do considering such uncertain times? By December, we should know all of these answers.
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rsaintvilus was long AAPL at the time of publication and has no positions in any of the the other stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.