Shares of satellite radio market leader XM (NASDAQ:XMSR) rose 20% in the first two days this week. For a company quite a ways from being free cash flow positive, what gives, other than short-term whims and pain for shorts?
First, a bolstering of finances. XM announced Monday a sale of 11.32 million shares for about $13.25 each, yielding $150 million in a deal expected to close today. When I looked at satellite radio recently in a two-part series, XM and Sirius Get Ready and Beyond the Price-to-Dream Ratio, one important cash factor was XM's need to launch a spare satellite and pay for another spare. This new moolah (at a cost of 10% dilution to Q2's weighted average 119 million diluted shares and current owners like me) plus $345 million at the end of Q2 puts the company in a stronger position and able to handle both the launch and replacement -- however long it takes for insurance companies to pay for the decline of the satellite being replaced. If they do.
Second was a press release with the misleading headline "XM Satellite Radio to be Standard Equipment on Honda Accord Models." Clicking to the release reveals that it's actually going to be standard on a few more "certain" models. Press releases can alert you to material information on your companies between quarterly SEC filings, but you must read critically.
The stock jumped, and the financials were part of the reason. But there's more. When any news draws traders and investors to boost a stock, shorts can feel more pain. As of the most recent monthly report, a whopping 45% of XM's float was sold short, with eight days to cover at average daily volume.
Because of rising daily trading in XM shares, the number of shares short -- over double that of a year ago -- is now a third fewer days to cover, but anything over a week can cause a quick price rise to bring a short squeeze. That is, when a short position holder wants to or is forced to cover at any price and increased loss. As we've seen this week, volatility rules. (To learn more about shorting and what it can teach an investor, there is really no better place than Jeff Fischer's recent two columns on shorting, the 10 Most Shorted and 10 More Most Shorted. These would be followed soon by Son of 10 More Shorted -- except I'm dibsing the headline right now!)
Both XM and competitor Sirius are speculations on the future of subscription-based satellite radio. Each is now well-positioned financially to continue the subscriber race and hoped-for profitability for at least six quarters at estimated cash burn and subscriber growth rates. Those add to a wild-eyed guess of the subscriber numbers and time frame it might take to turn free cash flow positive -- 2.4 million subs for XM and 1 million for Sirius by the end of 2004. Investors should do and understand their own estimates to avoid buying a dream -- and paying the price.
Tom Jacobs is the guest analyst for the upcoming issue of Tom Gardner's Hidden Gems. He owns shares of XM Satellite Radio.
