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Does Sirius Have a Fundamentals Issue?

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Is it possible that, despite all of the hullabaloo, Sirius XM Radio (Nasdaq: SIRI  )  isn't quite deserving of all the attention it gets from analysts, investors, and Liberty Media  (Nasdaq: LMCA  ) ? I know this is a controversial topic at the Fool, but it looks like there is some troubling data surrounding the company -- separate from the constant takeover talk. As has been evident for quite some time, it looks like Liberty will be taking the reigns, but are the fundamentals behind one of the most talked-about public companies looking sour?

I know, I know. There are a few companies a wise Fool writer should tread carefully with -- Apple and Annaly Capital among them. But Sirius XM might be the most controversial topic you'll find here, according to reader comments. Most of the talk surrounding the company focuses on the inevitable buyout by media giant Liberty Media. Though this buyout is opposed by many, I think John Malone knows what he is doing in the business and it is unlikely that he would engage in such a prolonged battle without some sort of gold at the end of the FCC-regulated rainbow. But beyond the deal talk, Sirius seems to have some problems with its fundamentals.

Third-quarter snooze
According to full-year guidance, net new additions are set to pass a milestone for the company: 1.8 million new subscribers. That sounds great, but at what cost? Customer retention looks to be suffering: In the first six months of this year, total deactivations amounted to over 3.6 million. The company offers retention discount programs aimed to keep people tuned in, but losing 7 million customers a year sounds troubling to me, regardless of new sign-ups. Remember when Netflix started showing similar trends?

Another interesting figure comes from household penetration rates for satellite radio in the United States. CEO Mel Karmazin cited that 13% of the 110 million households in the U.S. are willing to pay for radio. Now, we know pay radio will never approach the levels of adoption seen by pay television -- that's because pay television offers something we are willing to pay for. While I have access to money-burning streaming business Pandora (NYSE: P  ) , I don't feel the need to cough up the cash for Sirius' service.

Karmazin wanted us to focus on the potential here: If Sirius can increase its exposure in the household market, there is tremendous opportunity. That's totally true, but it's one big if. Satellite radio is no longer the new kid on the block in terms of tech toys. At only 13%, it looks like households may just not be that interested in incorporating the service into their homes.

Back up
Now, this is in no way to suggest that Pandora is currently a better investment than Sirius. That couldn't be further from the truth. Sirius does have some fundamentals that are fantastic -- mainly its ability to mint cash. From 2009 to 2011, the company increased cash from operating activities by 25%. Given the fierce regulatory environment, the dismal economic environment, and the fact that people can get most of what Sirius offers for free, this is a pretty impressive growth figure.

Pandora, though, with its incredible user adoption rates and disruptive technology, just can't seem to convert those listeners into dollars at a fast enough rate. Cash flow has been ticking up over the last couple of years, but this is one tough business. Microsoft just announced it is jumping in on the streaming music game with its Xbox music service. The 'Soft could  "pull a Microsoft" and totally screw it up, but if it doesn't, it's one gigantic red flag for Pandora.

Point being...
I wanted to make sure I'm in no way advocating Pandora as even slightly a good investment -- it's not -- but my point is that Sirius is facing an increasingly difficult competitive environment, and the deactivation numbers are showing that. You can sign new customers up all day long with promotions and new vehicles rolling off the lot, but keeping them tuned in looks like its only going to get harder. I need more than Howard Stern to keep me from going toward the free services. (I'm sorry, Howard.)

Sirius is a very difficult stock to buy right now. If you can relentlessly keep up with the news flow that comes out about the company, maybe you'll have some sort of informational advantage in short-term trading. But the stock simply is too hard to examine at a long-term level -- especially since it may not be around in the long-term.

What do you think of Sirius' deactivation rates? I know Fools have a lot of opinion surrounding this company, and I want to hear yours. Sound off below.

Despite being one of the market's biggest winners since bottoming out three years ago, there is still some healthy upside to be had if things go right for Sirius XM -- and plenty of room to fall if things don't. Read all about Sirius in our brand-new premium report. To get started, just click here now.

Fool contributor Michael Lewis has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Michael Lewis

Michael is a value-oriented investment analyst with a specific interest in retail and media businesses. Before coming to the Fool, Michael worked with private investment funds focusing on deep value and special situations. Currently living in the media capital of the world--Los Angeles, California.

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