Sirius More Undervalued Than These 2 Media Producers

By David Gould - October 1, 2012 | Tickers: AMZN, NFLX, SIRI | 0 Comments

• Email
• Print

Netflix (NASDAQ: NFLX) and Sirius (NASDAQ: SIRI) may both have the bears, but only one of them, Netflix, deserves it. From the egregious price hike to being overly aggressive in the shift towards streaming, management missteps should warrant the ousting, or at least board relegation, of founder Reed Hastings. One might think that this would make Netflix a takeover target; but, unfortunately, the long-term fundamentals are too weak to induce an entry - Just ask billionaire takeover titan Carl Icahn about Blockbuster.

Amazon Way More Overvalued Than Netflix

Netflix has the most comprehensive streaming library on the internet, but bears, including myself, complain that much of it could be found online through pirate websites. Well, Netflix at least ensures quality, and it comes at as reasonable a price as possible. Although it lost distribution rights to Starz Media, the business, like CBS, has a good amount of bargaining power. This, however, will come under considerable pressure from Amazon's (NASDAQ: AMZN) launch of a streaming business that is lower than the $7.99/month Netflix charge. While I find Amazon to be the most overvalued stock on the market, there is something to be said about the world's most successful eCommerce business extending into related businesses.

Compared to Netflix, however, simply too much upside is being factored into Amazon. To play devil's advocate, let me just add that I think Amazon opening a streaming business may end up, ironically, having a silver lining in the sense of elevating Netflix multiples. Whereas the downside from competition has depressed expectations, the possibility for multiples expanding to Amazon's sky-high levels has yet to be appreciated. If Netflix is to get anywhere near Amazon's multiples (which is saying something given how high they currently are), it could offset much of the downside from earnings erosion.

Even still, Netflix is in an openly precarious position compared to Amazon. Historically, it has relied on new subscribers to outpace costs of content additions. But with this "virtuous cycle" now broken, it will struggle to succeed in its global growth strategy. So, while Netflix's fundamentals are weak and recognized by the market as such, Amazon's fundamentals are strong but weaker than what the market acknowledges. Accordingly, if I had to recommend one to short in the long-term, it would be Amazon - Netflix simply needs to beat a low bar.

I think the thing that attracts so many investors into Amazon (and has kept its multiples up so high over the years) is that it is a symbol of innovation. The company has been reportedly looking to produce a mobile card reader that may have a rate as low as 1.9%. To aid the eCommerce legacy business, Amazon has launched a lending program for sellers. In my view, however, the innovation has been exaggerated. Is there anything really special about Kindle Fire versus, say, the iPad. At best, it's Apple without the strong free cash flow. And Google plans on releasing 2 Nexus tablets by the end of 2012 at only $99, which undercuts Kindle Fire. As much as the bears like to knock Netflix's for the inevitable competition, isn't it time that they do the same for Amazon?

Sirius: Better Than Both Amazon, Netflix

And, compared to both, Sirius looks substantially undervalued and is a potential takeover for majority shareholder Liberty Media - a business you should buy if it does acquire the monopolistic broadcaster. Ironically, Liberty Media is the same business that provides content (Starz) Netflix decided it could not optimally afford. What makes Sirius stand out from the bunch is just that: it has the content. By retaining top talent like Howard Stern, Sirius has cemented a brand. When you go to purchase a car, Sirius radio may already be installed, and the price is compelling enough to continually renew. Should, say, Stern leave the program, current subscribers won't leave in mass exodus but would stick with the brand. It's not a "Netflix thing" where a small seemingly minor adjustment could tick people off - radio subscribers are much less picky about the specifics. After all, you are a lot more discriminating about media on the couch than in the driver's seat.

Sirius also has fundamentals heading in the right direction. In late July, management redeemed the 9.75% Senior Secured Notes maturing in September 2015, which shows a comfort in debt levels and fits well within the expressed interest of returning free cash flow to shareholders. Attractive operating leverage and subscriber growth will drive strong free cash flow yields - a gain of 30% is within reach for 2012. This will enable the company to secure more attractive financing over the next few years and thus take away one of the central arguments raised by bears.

Dig Deeper

The precipitous drop in Netflix shares since the summer of 2011 has caused many shareholders to lose hope. While the company's first mover status is often viewed as a competitive advantage, the opportunities in streaming media have brought some new, deep pocketed, rivals looking for their piece of a growing pie. Can Netflix fend off this burgeoning competition, and will its international growth aspirations really pay off? These kinds of issues are a must know for investors, which is why The Motley Fool released a brand new premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to both buy and sell the stock. They’re also offering a full year of updates as key news hits, so make sure to click here and claim a copy today.

• Email
• Print
• Feedback