Just when it seemed as if Sirius XM Radio (Nasdaq: SIRI ) would stick to trading above $2, out went the floor. Shares of the satellite-radio provider dipped briefly below $2 yesterday before bouncing back at the close. The stock traded as low as $1.97 early this afternoon.
We may seem to be splitting hairs here, but this is the first time Sirius XM's stock has traded for less than $2 since the first week of January. The premium-radio giant seemed to be in a good place in recent weeks.
Sirius XM posted strong subscriber growth during the first quarter, bumping its guidance higher for all of 2012. A judge dismissed a lawsuit initiated by Howard Stern's camp, alleging that he was owed extra stock awards.
However, Liberty Media's (Nasdaq: LMCA ) ability to increase its effective stake in the company to 46.2% is weighing on the shares that may have discounted an outright buyout. Now it seems as if Liberty Media is content to nibble its way to majority control of Sirius XM.
Back in January, just days after Sirius XM broke above the $2 mark, I offered up three reasons the stock may never trade below two bucks again. In the spirit of full accountability, I'll take my lumps for getting that wrong. Let's go over the three things I thought would keep Sirius XM afloat.
1. Sirius XM really is cheaper this time
"Earnings multiples have a neat way of contracting when a growing company has a stagnant share price," I argued at the time.
That's still true. Don't be upset with a stock that's simply marching in place as long as the fundamentals keep improving. Sooner or later, the better valuation situation will pay off.
We're now that much closer to 2013, and analysts see Sirius XM earning $0.10 a share next year. Value hounds will scoff when I point out that Sirius XM is now fetching just 20 times next year's projected profitability, but we've come a long way from the days when Sirius XM was a freshly merged and profitless media company.
2. The competition came; it didn't vanquish
If cynics can't knock Sirius XM's lack of profitability or free cash flows, the next obvious bearish attack is the model itself.
Skeptics call Sirius XM's technology transitory, meaning that satellite radio will eventually give way to streaming. Well, it's hard to see that happening. Pandora Media (NYSE: P ) is now serving up more than a billion hours of Web-served music a month. There are now 51.9 million active listeners, 52% ahead of where Pandora was a year earlier.
Obviously, Sirius XM isn't growing as fast as Pandora, but it is still growing. Pandora is gaining eardrums, but they're coming at someone else's expense.
Last year saw automakers beef up their dashboard entertainment systems, increasing integration with smartphone streaming. Clear Channel's (OTC: CCMO.PK) iHeartRadio was relaunched in the fall, enhancing the free app's access to hundreds of Clear Channel terrestrial-radio stations as streams with a Pandora-like music discovery option.
Audio buffs had plenty of new options, but Sirius XM has been growing with every passing quarter for nearly two years.
3. It's going to be a good year
At least one of the catalysts that I was figuring would kick in this year did. Sirius XM's decision to raise its basic monthly rate by a reasonable 12% to $14.49 is causing average revenue per user to inch higher.
Other potential winning moves -- including the launch late last year of Sirius XM 2.0, and the promising Lynx receiver -- have yet to pay off. Speculation on what Liberty Media would do to increase its control of the company also hasn't paid off in a bullish manner.
However, it's still shaping up to be another year of reasonable top-line growth but even better bottom-line growth for Sirius XM Radio. It's a pity that it should fall back to revisit a price below $2, but it's hard to see this lasting for too long if the fundamentals continue to point in the right direction.
Running of the bulls
I remain bullish on Sirius XM's future. It should come as no surprise that I'm promoting the CAPScall initiative for accountability by reiterating my bullish call on Sirius XM for Motley Fool CAPS.
XM Satellite Radio was a Rule Breakers recommendation before the Sirius XM merger. It's now gone from the scorecard, but if you want to discover the newsletter service's next Rule-Breaking multibagger, a free report reveals all.