While the rest of the market greeted the New Year with a yawn, shares of Sirius Satellite Radio (NASDAQ:SIRI) surged over 20% on Friday, leading the Nasdaq in volume at 237 million shares, or about four times its average volume. (That's almost a fourth of the entire company changing hands in one day.) For the week, Sirius jumped almost 60%. What's going on here?
At first glance, you might be tempted to call this a short squeeze, but with less than 7% of the float sold short, there must be something else at work here.
I believe the scientific term for it is: kookiness maximus.
Remember, XM (NASDAQ:XMSR) is the leader in satellite radio. With around 1.2 million subscribers, XM has six times as many paying customers as Sirius. Nearly everyone attributes the lead to XM's nine-month head start over Sirius. Fellow Fools Jeff Fischer and Tom Jacobs recently toured the XM's headquarters and gave a round up of both XM's and Sirius' numbers.
But lately, Sirius has been making headlines with important but -- to Foolish eyes -- expensive sports deals with the NBA, NHL, and NFL. Sirius also has agreements to provide Satellite radio systems as OEM options in Ford (NYSE:F), DaimlerChrysler, (NYSE:DCX), and BMW automobiles.
There have been some rosy projections for satellite radio over the holidays, and for growth in the year 2004. At least one industry watcher, SkyWaves Research, predicts that Sirius will report an increase of 95,000 subscribers for the fourth quarter of 2003.
Sounds pretty good, huh? Ready to jump on the bus before it leaves the station? Before you do, let's take just a brief peek under the hood.
Siriusly scary finances
Let's begin with a reality check: Sirius is a firm that closed last Friday with a market cap of $3.8 billion, but has recorded just under $8 million in sales for the first three quarters of 2003. Sirius has been going through cash like the proverbial drunken sailor (somewhere around $90 million per quarter), and has posted quarterly net losses well north of $100 million for the past several quarters.
In fact, a trip through the Sirius's financials makes for some of the spookiest reading this side of Stephen King. The quarterly losses were actually accelerating at a horrific clip, as the company's net red ink has almost doubled every year since 1999, before flattening a bit this year.
Want a couple more chilling numbers? In Q3 '03, the cost of customer service and billing was $2.2 million. That expense alone ate up more than half of Sirius's $4.3 million in revenues. Call me a cynic, but I have doubts about a business that has to cough up $0.50 on its way to charging me a dollar.
I worry even more when it costs that business $12 to convince me to pony up that buck. (The third quarter's sales and marketing plus "subscriber-acquisition costs" totaled $53 million, more than 12 times revenue.) And there are plenty of other bills to pay at Sirius. As Count Floyd might have said, "That's some scary stuff, kids."
The life vest keeping Sirius afloat has been the issuance of new stock. The company that finished 2002 with well under 100 million shares now trades nearly one billion stubs.
Back in August, Tom Jacobs took a look at the two companies and pointed out that while Sirius had more cash -- due to that huge stock offering in early 2003 -- it was also burning that cash more quickly.
85 years of commercial-free bliss
The key to Sirius' survival (note: I said survival, not success) will be increasing its subscriber base. As of Dec. 9, Sirius had reached a self-described milestone of 200,000. Subscribers pay $13 a month. Do the math, and you'll see that the current pool of paying listeners will contribute a paltry $31 million next year. (And remember, this is the main source of incoming revenue. Advertising is negligible at a network that aims to be commercial-free.) Incremental increases in subscriptions may do little to offset current cash burn, but they might at least convince the Street that it's worth holding onto its shares.
But you should expect the price to fluctuate. To put some perspective on things, let's take a look at the current valuation. We'll back out an estimated $500 million in cash and assume that Sirius had a huge holiday season. If we estimate 250,000 current subscribers -- the number that SkyWaves Research claims Sirius may attain by early January -- Sirius's $3.8 billion market cap values the company at $13,200 (or 85 years of service) per subscriber. If Sirius could wave a magic wand and suddenly have 2.5 million subscribers by tomorrow morning, it would still be priced for over eight years of service per client. How rational does that seem?
The only plausible reason for last week's feeding frenzy may be the nod of approval Sirius got from fund manager Barbara Marcin on Louis Rukeyser's Wall Street. With all due respect to Ms. Marcin, this Fool believes that Sirius presents a seriously wonderful opportunity to ignore the Wise. The odds look better at the track.
Which pony gets your bet? Do you want to bet at all? Discuss on our satellite radio boards, Sirius and XM.
Seth Jayson thinks satellite radio is way cool. But when he's doing some rural road-tripping in his pickup, he prefers the local color available only on genuine AM radio. He has no plans to upgrade his mullet, either. You can reach him at [email protected]. The Motley Fool is investor writing for investors.
