Skip to main content

Beacon Equity Research

Market Commentary

Jeff Bishop
Editor, Beacon Equity Research

"Is It Time to Get Serious About SIRI?"

With all the press about Sirius Satellite (Nasdaq: SIRI) lately, it is pretty hard to come up with a clever headline that hasn't been used at least a hundred times. It seems everywhere you look in popular media everyone has their opinion on this stock, and satellite radio as a whole. You would be hard pressed to find a group of investors (either long or short the stock) that are more zealous about their opinion than the devoted faithful of SIRI. Every other writer has had ample opportunity to put in their two cents on this stock, so I almost feel obligated to share my opinion with our readers.

SIRI has had an amazing reversal in investor sentiment over the past two years. At one point the market essentially declared the company dead as it teetered on the brink of bankruptcy. In December of 2004 (less than three months ago) the same company sported a staggering market value of over $11 billion! Today, the shares have backed off a bit, but are still worth a combined $7 billion - still $2 billion more than the venerable Viacom (NYSE: VIA). It is amazing to me how an "efficient" market could do such a poor job in valuing this company. So, what is this company worth? And more important for traders, where is it headed next?

Well, let's take a moment to look at the facts: SIRI currently loses about $1.3 million PER DAY and values each of their 1.1 million subscribers at around $7000. These seem like pretty rich valuations, no matter how you spin them. On the other hand, the company recently signed one of the biggest names in entertainment, Howard Stern, to a 5 year exclusive deal. According to the terms, Howard should get around $100 million a year, so the real winner here may end up being Mr. Stern and not SIRI shareholders -but let's give them the benefit of the doubt for now. SIRI also has the rights to the best sports lineup in the industry; NFL, NHL (if they ever play again), NBA, NCAA, and now NASCAR. The Company also forecasts that it will reach 2.5 million subscribers by the end of the year, so the growth here may very well be phenomenal.

I have looked at both arguments for this company, and though the future seems bright, valuation still concerns me a bit. I see no reason why satellite radio will not be the future. Even with a monthly fee (currently about $13 for SIRI and $10 for XMSR) I think a good portion of the country will eventually sign up for the service. I say this not just because of the higher quality channels and advertising-free broadcasts. There are so many possibilities that have yet to be realized for satellite radio that most people just don't realize. What about the ability to download music via an Ipod-like device? This is just one example…the point is that the technology is so young that we don't fully know what it is capable of. As the market grows and more hardware and software vendors get together we will see new applications come to market that are just dreams right now. The technology for traditional radio broadcasting has been fully developed; we are unlikely to see any more innovation there.

So where does the stock go from here? Honestly, I think it goes lower in the near-term. Well-known financial commentator, Jim Cramer, said he thinks it will test $4 soon, and I tend to agree. The technicals just don't look very promising in the immediate future. What I do think is that SIRI will beat out XM Radio (Nasdaq: XMSR) over the long run. They just seem to have better product, which eventually will win out. Also, as I mentioned earlier, satellite radio is going to be future - there is little doubt about that. So how do you play this? Well, if you feel as I do about SIRI beating XMSR and the sector as a whole, then it seems natural you would short XMSR and take long positions in SIRI. This would hedge against declines in the sector, as well as provide upside if SIRI actually pulls it off.