Why You Can Still Go Wrong On Sirius At $2
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Given the current economic climate, it's been a rough couple of years for most companies. But for Sirius XM Radio (NASDAQ: SIRI), it's been a bad decade. In 2000, the satellite radio provider was trading north of $60. Currently, the stock is trading around $2. In fact, the stock has not seen $5 since 2006. While some still believe Sirius could make a comeback, recent developments lead me to believe this is unlikely. Given recent news surrounding the company, as well as the future prospects of streaming music, I argue investing in Sirius is a waste of time.
Sirius XM CEO Mel Karmazin announced he was once again selling shares of the embattled radio company. He has done this in the past, and many investors believe the stock will face another drop as a result. It's a troubling pattern, and it doesn't look like anything is going to change soon on that front. But to be fair, not all investors have such a negative view of Sirius. Motley Fool's Sean Williams actually argues Sirius is "looking better and better by the day." He correctly notes Sirius' supremacy in the area of automobile satellite radio, as the company is surely the premier option for customers looking for a wide variety of quality radio stations they would otherwise be unable to get in their media markets. Williams also points out that competitors like Pandora Media (NYSE: P) rely much more heavily on advertising revenue, as opposed to Sirius who relies almost entirely on subscription fees from customers. That's a more sustainable business model, as companies are still figuring out how to make money from advertising with services many people use for free, such as Pandora's. But more on streaming music later.
Though investors like Williams may be more bullish on Sirius than others, even he admits the amount of debt faced by Sirius is rather troubling. These tough financial times for Sirius led to an attempt at a takeover by Liberty Media (NASDAQ: STRZA), which was rejected by the FCC back in May. The deal is not completely dead, however, and though Karmazin is determined to ride out the storm, Sirius being taken over by Liberty is a real possibility.
Another worrisome development in the news for Sirius was the recent announcement from Verizon (NYSE: VZ) of its acquisition of Hughes Telematics, an automobile technology company. The move will allow Verizon to begin developing technology for automobiles that may include streaming music, which would absolutely cut into the profits of a satellite radio company like Sirius. Verizon's acquisition of Hughes Telematics was not a shock, but it is a sign of the looming problem Sirius XM could be facing: the rise of streaming music.
Anyone who is the least bit technologically savvy has no doubt been watching the rise of streaming music with intrigue. Pandora has been successful for years with its radio service that caters to individual music tastes. While consumers of traditional radio are essentially captive audiences who listen at the whim of a small-town DJ, Pandora offers internet radio that pinpoints exactly the type of music a given listener would want to hear based on what they have "liked" in the past. Alternatively, users can enter an artist they like into a search, and a radio station will be created that features songs by that artist as well as others who the listener may enjoy as well. This was taken even further by privately held Spotify, which offers what is essentially music on-demand, with a huge catalogue of options for people to listen to whenever they want. The changing nature of music leads me to worry that companies like Sirius XM could be left in the dust, especially if technology is developed (like what Verizon is attempting to do with Hughes Telematics) that allows for such streaming services to be easily used in automobiles. For now, Sirius is alright, but I don't see a very bright future on the horizon.
Another threat to Sirius comes from the recent release of Songza, a music streaming application from Apple. While some investors look at Songza as more of a danger to Pandora than Sirius XM, I believe it's just another bellwether indicating the direction music is taking - away from captive radio audiences and toward on-demand, interactive experiences.
On the positive side of the ledger for Sirius is that in terms of direct competitors in satellite radio, there essentially are none. One company, Cumulus Media, is facing the same sorts of difficulties as Sirius but without the name recognition and profitability. So to be clear, Sirius XM is definitely still the king of satellite radio. But the question is: How long will being the king of satellite radio mean anything? If music takes the direction I believe it is taking, then the answer is not very long. While there will always be a market for the essential service Sirius offers, giving users a taste of new artists they don't already know, other companies could do what Sirius does, and perhaps better. Sirius certainly offers a lot of quality content, but I just don't know how much it still has in the tank (or in the bank, for that matter).
To be clear, it's not all bleak for Sirius. Some are excited about its release of "Satellite Radio 2.0" and remain optimistic about the potential for long-term growth for the company. And at its current price under $2, it's tough to imagine things getting much worse for Sirius. Thus, you could make the argument that it has reached bottom and can only go up from here. However, the current direction of steaming music leads me to believe the company just doesn't have much time left. Therefore, I cannot recommend investing in Sirius XM for the foreseeable future.
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