Sirius XM Holdings (SIRI +0.00%) hit 11-year highs earlier this month -- fortified after posting another blowout quarter in late July -- but it doesn't mean the naysayers have gone away. There were a whopping 266.5 million shares of the satellite radio provider sold short at the end of July, its highest short interest on the investment since mid-March.
Short interest on Sirius XM has risen by 20% over the past year, but that's just one data point. The stock has soared 37% over the past year, so the value of all of the short positions on Sirius XM has actually skyrocketed 65% over the past 12 months. There are now more than $1.5 billion in bearish wagers against the stock in the form of short positions.
Sirius XM routinely tops the list of most shorted Nasdaq stocks by share count, so the bearishness isn't new. Some of those positions are hedges, but by and large it's a fair indicator of the pessimism among speculators when it comes to Sirius XM's near-term prospects. Shorting Sirius XM has been dangerous in the past, and that's not likely to change. Let's go over some of the reasons why Sirius XM eats bears for breakfast.
Image source: Sirius XM.
1. Sirius XM is thriving in the era of connected cars
It's not fair to call Sirius XM the leader in premium radio anymore. Spotify topped 60 million paying subscribers this summer. Sirius XM customers may be paying more, but at 32 million accounts it's now half the size of Spotify's audience.
Sirius XM remains an absolute success. It has been able to consistently grow its customer base with every passing quarter. There's no shortage of smartphone-saddled drivers using Bluetooth connectivity to stream apps through their dashboards, but Sirius XM is still finding a way to make it work. The 1.7% monthly churn rate it posted in its latest quarter is near the low end of its historical range.
2. Winners keep winning
Sirius XM was also the most-shorted stock a year ago, and we've seen those betting against the satellite radio monopoly get burned with the 37% surge over the past year. This isn't a fluke. Sirius XM stock has been on fire since bottoming out at $0.05 in early 2009, better than a 100-bagger in that time.
Sirius XM stock is moving higher for the ninth year in a row. The streak won't last forever, naturally. However, a trail has been paved of scorched shorts since the stock bottomed out in 2009, betting that this is the year the stock unravels. It hasn't happened.
3. Sirius XM is putting its money to work
From aggressive share buybacks to a modest dividend, Sirius XM is doing a good job of returning money to its shareholders. It's also making smart deals. Sirius XM turned heads last summer when it showed an interest in acquiring Pandora (P +0.00%). It waited until this summer to instead take an effective 16% stake in the music streaming giant at a much lower cost basis than it was considering a year earlier.
Pandora recently raised the money it will likely use to close on the purchase of its stake in Pandora, and it did so at a rock-bottom interest rate that's a sliver of what Pandora would have to shell out if it wanted to finance itself. In fact, Sirius XM's paying less than the 6% preferred share dividend it stands to collect from Pandora.
The Pandora deal is just one of the smart deals that Sirius XM is making. Never underestimate the power of a company expected to generate $1.5 billion in free cash flow this year -- which as fate would have it is also the value of the shares sold short.
