If you miss Dueling Fools as much as I do, you're in for a retro treat. Tim Beyers and I are dusting off the concept to take a look at Sirius XM Radio (Nasdaq: SIRI ) from both sides.
I am bullish on the satellite radio company. My friend Tim is bearish. Enjoy these two articles today. Come back Monday, when we'll face off again with our rebuttals.
You go, satellite radio
Why does Sirius XM get such a bad rap? It's mortal, obviously. The company has made some silly decisions that have resulted in losses, major shareholder dilution, gobs of debt, and a miniscule share price. I'm sure Tim will have a field day in that sandbox. However, take the moment to dust yourself off, take two steps back, and take another look at the company.
Sirius closed out 2008 with more than 19 million subscribers. How many premium services do you know with larger membership rolls? There's Comcast (Nasdaq: CMCSA ) . There's Research In Motion's (Nasdaq: RIMM ) BlackBerry. I'm hearing mostly cricket chirps after that.
When the company's debt repayments got so burdensome that Chapter 11 bankruptcy loomed, at least two suitors -- EchoStar (Nasdaq: SATS ) and Liberty Media (Nasdaq: LINTA ) -- went public with their desire to bail out Sirius in exchange for a piece of the action. The collection basket has come up empty when other household names like Lehman Brothers, Circuit City, and Bennigan's have had a cash crunch over the past year. Sirius is clearly valuable to the media industry. It's no Lehman. It's no layman.
Sirius XM is also valuable to the music industry (with its deep playlists whetting appetites for bands that normally don't receive terrestrial radio airplay), the automotive industry (with its receivers arriving as factory-installed options in more cars, and cash-strapped automakers receiving royalties based on the subscribers they deliver), and just about anyone who needs a little entertainment during routine commutes.
Great concepts aren't always great stocks
Sirius XM was one of the few consumer-facing subscriber services to grow its net usage base during the final quarter of 2008, closing out the period with 82,945 more subscribers than when it started. Again, that places it in limited company, as many popular entertainment providers like TiVo (Nasdaq: TIVO ) and DISH Network (Nasdaq: DISH ) actually shed accounts during the period.
Naturally, a business model can radiate with users but still fail on Wall Street. Sirius XM is guilty as charged in that regard. There's an ocean of red ink in its wake. Even when it does something right -- like finding a sugar daddy in Liberty -- it comes at the expense of even larger debt interest exposure down the line.
I refuse to call Sirius XM a fiscal failure, though. It is just way too early to pass judgment. Now that Sirius and XM are one, we can begin to appreciate the synergies that will improve with every passing quarter.
Cash operating expenses were slashed by 22% during the company's final quarter of 2008. Pro forma revenue inched 16% higher. This is really just the beginning. Sure, debt payments alone will likely consume the more than $300 million that Sirius XM is targeting in adjusted EBITDA this year. It should only get better from there, though.
Sirius XM will grow until there is a better mousetrap. Bears may argue that streaming smartphones, Internet radio, and HD Radio will bury Sirius XM, but where's the grave? These technologies have been around for a few years yet Sirius XM continues to grow its subscriber base.
Cynics underestimate the importance of satellite radio to the weary car manufacturers. They also point to the future as problematic, without realizing that many new revenue streams -- like digital video delivery and e-commerce solutions -- will actually expand at Sirius XM in the years to come.
The future will also provide Sirius XM with more attractive opportunities to whack away at its hefty debt, and the flexibility to build on top of its already magnetic offerings.
I am not naive. The dilution that is billions of shares deep that Sirius XM was forced to surrender this year to stay solvent and alive isn't pretty. It certainly lowers the ceiling of what Sirius XM may be ultimately worth. This isn't going to be a $20 or even a $10 stock over the next few years. However, at today's prices, it doesn't have to get anywhere near its old highs to easily beat the market over the next several years.
The catalysts are in place. They just need a little dusting. Step away from the sandbox and try it yourself.
Read Tim's bearish argument on Sirius XM, and come back on Monday for the rebuttal arguments.
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