Image source: Sirius XM Radio.
There are a lot of people betting against Sirius XM Radio (SIRI -0.79%) these days, even as the stock is hitting 10-year highs. There were 280.1 million shares of Sirius XM sold short at the end of 2016, just below the late-November peak of 285.1 million shares but nearly double the short interest that we were seeing a year ago.
One can argue that the boo birds have a lot of fair reasons to be bearish. The stock is at its highest point in more than a decade, prompting valuation concerns. The company continues to court Pandora (P) in public, a potential purchase that the market generally isn't very excited about. There's also the incessant fear that the smartphone revolution and the connected car will dismiss satellite radio as transitory and expensive entertainment.
Things don't have to end badly for those long Sirius XM stock. If anything, it may be the naysayers that get burned. Let's go over a few of the reasons why it could be dangerous to bet against Sirius XM this year.
1. Sirius XM has a strong history of boosting expectations
Sirius XM closed out 2016 with a record 31.3 million subscribers, 1.7 million more than it had when the year began. Its guidance for 2017 calls for just 1.3 million net additions this year, leading many to believe that growth is decelerating at Sirius XM -- but that would be a mistaken assumption.
Sirius XM's initial guidance for 2016 was for 1.4 million net additions, and we see how that played out. A year earlier, the original forecast called for 1.2 million net adds, and the company wrapped up 2015 with 2.3 million more subscribers.
Go through the past few years of financial releases and you will see a company that boosts its subscriber, revenue, adjusted EBITDA, and free-cash-flow targets more often than not. It's hard to short a company that says one thing and does something better.
2. Pandora -- if it happens -- won't break Sirius XM
Paying and possibly overpaying for Pandora are concerns for bulls and bears in this battle. Lost in the shuffle is the detail that Sirius XM's enterprise value of nearly $28 billion is a lot more than Pandora's $3 billion price tag. Even at a modest premium, the acquisition would be a move that dramatically expands Sirius XM's streaming audience and potential satellite radio leads without radically expanding its market cap.
Pandora would be dilutive to Sirius XM's earnings in the near term, but let's not dismiss the synergies as support costs could be shaved and many of Sirius XM's subscribers could be swayed to pay for Pandora's nascent yet growing premium platform.
Sirius XM executives have made it clear that they're not going to overpay for Pandora, and if they had been willing to overpay, they would have probably struck a deal by now. Sirius XM and Pandora make sense together, and if it happens, it will be at a price that is not detrimental to either camp.
3. Satellite radio is not transitory
It's been years since doubters have warned that smartphone-wielding drivers with tethered dashboard apps would kill Sirius XM. Every year finds more and more automakers beefing up their tech to make streaming from drivers' phones seamless.
Terrestrial radio has taken a hit, but not Sirius XM. Satellite radio's popularity keeps expanding, with seven-digit subscriber gains year after year. Until we see signs of growth at Sirius XM peaking, the stock's blazing run since bottoming out in early 2009 will continue to be fueled by shorts covering their positions as their bearish projections get obliterated. No technology stays on top forever, but Sirius XM is looking pretty good in the near term.
