Why Does Wall Street Hate Sirius XM?

A week ago today, Sirius XM Radio (Nasdaq: SIRI  ) should have deflated the last of its critics. The satellite-radio juggernaut delivered head-turning results for the third quarter. It posted breakeven results for the first time in its red-inked history. It posted a sequential gain in subscribers for the first time since last year.

Trading at $0.61 before the blowout quarter, the stock popped to open at $0.65 on the news -- hit an intraday high as $0.69 -- before closing at $0.64.

The stock has been meandering ever since, though a refreshing Standard & Poor's credit upgrade last night has pushed the stock to as high as $0.67 a share this afternoon.

Few will scoff at a 10% gain on a percentage basis over the past week, but many would argue that the upbeat developments deserve a more robust ticker tape parade.

This was a company that was on the brink of bankruptcy in February, and now S&P is upgrading its credit -- from "stable" to "positive" -- to quell any cries of a near-term financial demise. This is a company that is forecasting adjusted operating profits to grow 20% next year, and that's on top of the more than $400 million that it is looking to ring up this year.

What's it going to take to get a little respect around here? Let's go over a few of the scenarios.

A penny for your institutional-investing thoughts
Mutual funds and other institutional money managers are reluctant to purchase shares trading for less than $5, much less pocket change. Individual investors have served Sirius XM well during last year's downturn -- and have profited handsomely from this year's bounce -- but they may not be enough to push the stock up to levels where fund managers are comfortable buying in.

Sirius XM's problem here is that it has too many shares outstanding. There were 3.6 billion fully diluted shares outstanding at the end of the third quarter. That doesn't include Liberty Capital's (Nasdaq: LCAPA  ) stake. Liberty owns 12.5 million preferred shares that can be converted into a 40% position in Sirius XM. As of right now, each preferred share is good for nearly 207 common shares -- or a total of nearly 2.6 billion more shares.

How high do you think Sirius XM's stock can climb when revenue and future profits will be divided into 6.2 billion shares?

If satellite television providers DISH Network (Nasdaq: DISH  ) and DirecTV (NYSE: DTV  ) had to divide their market caps by 6.2 billion shares, we'd be talking about stocks priced at roughly $1.50 and $4.50, respectively.

And let's be realistic. Anyone that argues that Sirius XM deserves DirecTV's market cap is ignoring that DirecTV is consistently profitable and generating more than eight times Sirius XM's revenue.

A reverse stock split is not a popular solution to skirt Nasdaq's delisting threats, and it may not be necessary if Sirius XM can get its stock over the buck mark next year. However, even if Sirius XM somehow appreciates beyond that -- a buck and change may still not be enough to appease fund managers with minimum price thresholds. A reverse split may be the ticket into the hearts of institutional investors who like the Sirius XM story but have a hard time justifying the purchase of a $0.66 stock to their clients.

Given the recent success of reverse split graduates Priceline.com (Nasdaq: PCLN  ) and AIG (NYSE: AIG  ) , the stigma of a reverse may also wearing off.

Plan B and beyond
If reverse stock splits are out, Sirius XM is going to have to grow substantially, ideally generating high-margin profit opportunities along the way.

There is certainly hope on that front. Sirius XM broadcasts to 18.5 subscribers. We're talking about a sizeable chunk of the population that is comfortable in paying what is now $15 a month for premium radio. They have discretionary income. They're moving around. It's a marketer's -- or a milkmaid's -- dream.

This is ultimately the key for Sirius XM, since there isn't a lot of material upside in rate hikes or subscriber growth. This isn't a company that will have 37 million subscribers paying $30 a month in a few years. No, this is a model that may have matured on the subscription front, but can kick it into a new gear with incremental opportunities.

One of the bigger disappointments at Sirius XM is that advertising revenue per user has been shrinking lately. The lackluster economy isn't helping, but this is hopefully something that the next generation of interactive satellite receivers can fix.

I'm not just talking about the obvious Apple (Nasdaq: AAPL  ) iTunes tie-in, where folks can tag songs they like and purchase them. Two-way receivers that allow subscribers to request advertiser information -- and possibly even make purchases -- will open new revenue streams at Sirius XM. Can you imagine a shopping channel on satellite radio? Knowledgeable shoppers don't need the visuals. This can work.

There are also other areas including channel sponsorships, genre compilations, terrestrial syndication, and social networking where Sirius XM has barely scratched the surface.

Congratulations to Sirius XM for breaking even last week, but now it's time to break it wide open. Institutional respect and shareholder gains are waiting at the other end of dreams fulfilled. Can you live with that, bulls? Bears, can you afford to stand in the way?

What do you think Sirius XM needs to do to earn Mr. Market's respect? Share your thoughts in the comment box below.

Apple and Priceline.com are Motley Fool Stock Advisor picks. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz is a subscriber to both Sirius and XM. He owns no shares in any of the companies in this story and is also a member of the Rule Breakers analytical team, seeking out the next great growth stock early in its defiance. The Fool has a disclosure policy.


Read/Post Comments (27) | Recommend This Article (21)

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  • Report this Comment On November 12, 2009, at 3:03 PM, RAF22 wrote:

    Rick - With regard to the tremendous upside potential now awaiting satellite radio, I offer the following quote that I just saw today, from a multi-billionaire whose start came from opportunities within the emerging cable TV industry:

    "Cable TV was in its infancy. It was scalable across a range of systems and had a high barrier of entry. That's a recipe for profits."

    Sound like Sirius XM to you??

  • Report this Comment On November 12, 2009, at 3:13 PM, dedmunds wrote:

    Okay, Rick thanks for the respect. I think it has been a long time in coming.

  • Report this Comment On November 12, 2009, at 3:33 PM, nayeemfm wrote:

    You were all wrong with your 3rd Qtr subscriber estimates and your EPS. Why dont you say you were wrong Rick? I am attaching the link to prove you were wrong. This company is growing fast and it will be generating profits in few months. You were slow to understand this like the Wall Street is doing now. They will soon realize that this company will be one of the hottest media company out there.

    http://www.fool.com/investing/general/2009/11/04/3-questions...

  • Report this Comment On November 12, 2009, at 3:40 PM, karaokejb wrote:

    Rick-

    Try dilution at 9B Authorizied shares worth of dilution. If you read financials that's what it's actually at! Most of these shares are not ssued, but are made availabel for hedging against the bonds. I believe most analsyts are fully aware of this number as well. The closure of the current debts will allow the board to reduce authorizied shares and thus actual dilution. But with recent S&P ratings, future refinance will be cheaper & thus pushing Sirius into the positive investment catagory.

  • Report this Comment On November 12, 2009, at 3:45 PM, ItAintCool wrote:

    Rick,

    For every 1 neutral to positive article you, MF, or TSC posts, 8 others are posted that are negative. One of the reasons for the Wall Street hate is standing is this site (and TSC). Past MF articles has cherry picked the information that supports your negative line while glossing over (or ignoring) the positives that the company has to offer. Sometimes it even goes to the extent of giving misleading or incorrect information. You can call us conspiracy theorists, but many believe this is just deliberate manipulation on MF & TSC's parts.

    Take this past Tuesday when Siri had already posted a remarkably good quarter, a couple of mixed-positive articles show up and then what happens? The Street posts 10 separate articles and videos about how bad Sirius is (and then claim that none of these reporters knew what they were going to report), MF posts an article with the misleading headline "This Mistake Could Cost You a Fortune" (which is linked to Siri if you look for it online). Perhaps they didn't know the details of what each one was writing, but the agenda seems clear; Wait for the stock to gain a few points on good news, short it and bash Siri so it drops down from their gains and make some $.

    Sure in the fairness in "full disclosure" none of you will own or say you shorted any of this stock, just before writing the article. But what about your friends & family? What about your superiors at these sites? We don't see their holdings or transactions posted in interest of "full disclosure", even though I'm sure they probably know what you've written before it goes to publication.

    I'd love the SEC to do a full investigation of every MF & TSC writer who has been majorly pounding on Siri for the last year and follow who is in their circle of friends of family that may have gained every time these articles post. Then again, the SEC is toothless tiger. So keep gaming the system Rick.

  • Report this Comment On November 12, 2009, at 3:46 PM, Stockguru66 wrote:

    I will tell you why they bash it. It's part of their manipulation strategy. They have money and you don't.

    If you sell you lose. for those who have a few hundred or few thousand shares they want to scare you into selling so they can buy it at 30 cents. Hold your SIRI. Screw them.

  • Report this Comment On November 12, 2009, at 4:09 PM, esteemxxxx wrote:

    Whether its THE STREET, or The FOOL'S, REAL MONEY or some other yahoo. They're all taking advantage of the attention Sirius XM is getting. An article on SIRI allows them to sell advertisement at premium. Negative news sells folks NOT good news. Bad news in inherently juicier.

    True, there is a past downside to the Sirus story but why lead with the bad news, which is in the past anyway? Of course, the answer is obvious: bad news is more likely to attract a casual reader’s eye than good news. It’s a secret journalists have known for years. Bad news gets more attention than good news, meaning more people are likely to read a story if the headline implies something rotten rather than something wonderful. Doesn't mean that SIRI is going down, of course -- just that more people, or dummies I should say, are inclined to read their articles. The responses on this page prove it. It's a fact that people are naturally gullible NOT skeptical.

  • Report this Comment On November 12, 2009, at 4:17 PM, ronnie456 wrote:

    Again repeating stuff we already know...

    Your such an idiot, you might want to have someone proof read your article before you submit it.

    "Liberty owns 12.5 million preferred shares that can be converted into a 40% position in Sirius XM. As of right now, each preferred share is good for nearly 207 common shares -- or a total of nearly 2.6 million more shares."

    2.6 million or billion???

    Are you guys hiring? I can rewrite articles with the same info over and over again, and I can do correct math.

  • Report this Comment On November 12, 2009, at 4:29 PM, king4life wrote:

    SIRI has risen from .06 to .66 with the same number of shares as well as the largest Short position on wall street. FMR does not have a problem investing in SIRI. Does SIRI need those who require $5?

    The question you should be asking is why does The Street and Jim Cramer hate SIRI investors? Why do they have a need to slam SIRI with 6 articles Wednesday on a .61 stock? Slow day at Citicorp?

    Cramer has a Buy on Citicorp with no net profits in site. Oh yeah, book value! Pffff. It has become personal with Cramer! He hurt the individual investor and he is bitter of all the hate mail.

    Mel should be the CEO of the year, for sticking by the small investor!

  • Report this Comment On November 12, 2009, at 4:32 PM, ahoythere wrote:

    12:1 rev split seems in order

  • Report this Comment On November 12, 2009, at 5:39 PM, wtmdx82 wrote:

    where's SIRIDoom???

  • Report this Comment On November 12, 2009, at 5:57 PM, Bootluver wrote:

    Its not Siri Wall Street, its the worthless Motley Fool A-Holes they hate. Please can we be done with this site once in for all???? Geez!!

    Boots

  • Report this Comment On November 12, 2009, at 9:46 PM, southernbeachguy wrote:

    All I can say is that if Hedge Funds or Institutions don't want to invest, there is more for me to buy at a lower Price. YTD Sirus is up 450%, and for the 13 months that I have had it, I'm up over 70%. I guess that I should start a Hedge fund, because I bet they haven't made that on their investments for the past 13 months.............. I can tell by looking at my 401K. If fannie & Freddie can go from .45, 3 months ago to 1.40 now, Sirus should be at $25.00. We all know Sirus will be another DirecTV in a few years, especially after they expand to Europe, Asia and South America.

  • Report this Comment On November 12, 2009, at 10:10 PM, PlanToWin wrote:

    nayeemfm: Rick actually did admit that his guess was wrong on his SIRI subscriber count:

    http://www.fool.com/investing/general/2009/11/05/3-answers-f...

  • Report this Comment On November 13, 2009, at 7:10 AM, plange01 wrote:

    the only thing keeping srius out of bankruptcy is large cash infushions from a private investor.when he runs out of money so does time for sirius.there is no way sirius can stay open on its own earnings.

  • Report this Comment On November 13, 2009, at 8:01 AM, TMFMarlowe wrote:

    Hm, I'll take a guess... "Wall Street" hates SIRI because it's a business that seems likely to be overtaken by technology within a few years? I mean, why pay a monthly fee (and buy a special receiver) for Sirius XM when bazillions of folks are streaming great content to your laptop or phone (which you can plug into your car's sound system) for free?

    If those $15-a-month folks aren't already pondering that question now, they will be. I just don't see how this company exists in 10 years without a substantial reworking of their entire business model.

  • Report this Comment On November 13, 2009, at 11:30 AM, SIRIRICH wrote:

    SIRI will make you RICH!!!!

  • Report this Comment On November 13, 2009, at 12:17 PM, xjp83x wrote:

    Sure, SIRI can make you rich, it can also burn you too.

    I don't think SIRI will be able to make it. Like TMF said, XM radio technology is not as innovative as the current technologies. I haven't seen anyone near me going crazy about this XM stuff. They will most likely fail...

  • Report this Comment On November 13, 2009, at 2:11 PM, SIRIRICH wrote:

    As far as technology goes I believe they have a winner. But, remember when cell phones were first introduced they were BIG, analog and didn't work very well. The cell phone people adapted with smaller phones, digital service, data, internet and now everyone has a cell phone. Sat radio will do the same. They will adapt their technology or whatever they need if they need to and they will rule. Just imagine interactive sat radio devices or sirius xm sat receivers integrated into all cell phones (like GPS) or even sirius backseat TV??? As well I am a pilot and I use XMWX another service offered by Sirius Xm for my in cockpit weather service. They are a GREAT company that offers GREAT services and that is what counts. Give it time and you to can be SIRIRICH!!!!!!!!!!

  • Report this Comment On November 14, 2009, at 5:27 AM, wuff3t wrote:

    "Your such an idiot..."

    You know, if you're going to call someone an idiot you should at least make sure you know the difference between "your" and "you're"...

    And to all those asking why TMF, The Street and many others keep bashing SIRI - maybe they're all right?! I mean sometimes if it walks like a duck and quacks like a duck, it really is a duck...

  • Report this Comment On November 17, 2009, at 1:33 AM, Don354 wrote:

    The stock's a loser....always was, is and will be. ' Nuff said!!

  • Report this Comment On November 17, 2009, at 9:42 AM, wordcarr wrote:

    SIRI will fail,not because of tech or money matters,but rather content. Sat radio can't delivery the content that the vast majority of people listen to their local radio stations for.Local earth stations provide the same music and news minus potty mouth announcers with local news,traffic, weather and talk.Radio stations are required to serve the community they are liscensed to.Sat can't do this,Siri is like the pet rocks that were sold years ago or the great commercial short wave radio idea.Think about it ,what can sat radio provide to a person in a city with 25 free earth stations to choose?

  • Report this Comment On November 17, 2009, at 4:32 PM, VegasMartin wrote:

    EASY. Through share dillution, their CEO has firmly placed the company's debt on the backs of its shareholders.

    http://www.ShootTheBears.com

  • Report this Comment On November 17, 2009, at 4:54 PM, CoastalTrader wrote:

    I am so sick of SIRI cheerleaders. Every single time there is any mention of SIRI in whatever context, here come the cheerleaders crying foul or worse.

    I am a SIRI subscriber. I like my sat radio. I really do. I think sat. radio is a cool idea.

    But speculate on SIRI stock? Not with real money. No way! For anyone crazy enough to have bought at $0.05 and rode it up, good for you. You had a good trade. But don't confuse a garbage bin trade with an investment. Crap floats. Watch out for when the flush that loser.

  • Report this Comment On November 18, 2009, at 11:18 AM, MADACASTO wrote:

    Better question - "why does TMF looooooooove SIRI?" Oh, maybe because it has a high rating among it's herd? Um, yup.

  • Report this Comment On November 18, 2009, at 6:17 PM, firestorm62 wrote:

    wordcarr, how about commercial free music? That's what I'm talking about! Nice try though. Now, take your $275. short position and go away.

  • Report this Comment On November 19, 2009, at 9:56 AM, wordcarr wrote:

    Pandora,ipods just to name two ways of not paying SIRI and have no commericals.I'm not against sats delivering content to the masses,in fact if there were people that could think outside the box at SIRI sat delivery of content could be big,but not trying to deliver earth radio content.Your projecting your personal taste on the vast majority of radio users.The washed-up radio execs at Siri have no clue, they'er in it for the $$.As for the cheerleaders and you,reads like you skipped investing 101,didn't read Peter Lynch's book either.I'm short $ 27.50 not 275.

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