When I look at companies like XM Satellite Radio
Profitless prosperity
My old boss' definition of profitless prosperity fits XM Satellite Radio to a T -- rapidly increasing numbers of customers and revenue, but an even greater increase in operating costs. Sure, the investment thesis is that grabbing customers hand over fist is the right strategy to set up the company for big profits in the future, but just when will that future arrive? In the meantime, the company is funding its cash deficit with equity offerings and increased debt.
|
(Numbers in Millions) |
2001 |
2002 |
2003 |
2004 |
2005 |
TTM |
|---|---|---|---|---|---|---|
|
Revenues |
$0.5 |
$20.2 |
$91.8 |
$244.4 |
$558.3 |
$835.3 |
|
Net Income |
($284.4) |
($495.0) |
($584.5) |
($642.4) |
($666.7) |
($730.5) |
|
Shares |
75.3 |
101.3 |
185.0 |
210.9 |
257.9 |
268.5 |
|
Long-Term Debt |
$411.5 |
$412.5 |
$743.3 |
$948.7 |
$1,035.6 |
$1,342.6 |
|
Equity Value |
$926.7 |
$592.3 |
$532.9 |
$336.2 |
$80.9 |
($253.2) |
The equity value row is particularly telling -- even as the company bolsters its equity through frequent share issues, it still manages to destroy shareholder value. The only way this could possibly make sense is if the company could eventually dominate its industry and become the eBay
Chasing cars
XM's best hope appears to be with original installation in new cars. I can certainly see the company continuing to increase its subscriber numbers through this channel. However, not all drivers will pay a monthly subscription, even if the equipment comes installed. Many, like me, are content with free terrestrial radio for local news, traffic updates, and sports, and many prefer to choose their own music via an MP3 device. Car manufacturers know that, too -- most new cars now accept inputs from such equipment. Another problem for XM is that auto manufacturers such as GM
Foolish final word
All pre-profit companies predict that they will grow their way to profitability and consequently emphasize sales and, in XM's case, subscriber growth.
If you're hanging on to this stock, I suggest you think again. At the end of 2005, the company had 5.9 million subscribers and was predicting 9 million by the end of 2006. However, growth has slowed dramatically, and at the end of the third quarter, the year-end estimate figure had slumped to between 7.7 million and 7.9 million. If you add on increasing customer acquisition costs, plus increasing churn (customers that don't renew), then I think you'll get the picture -- ultimately, satellite radio will never appeal to a big enough market to make XM's predictions of 20 million subscribers by 2010 a reality. There are too many other cheaper and more convenient alternatives, and I'm confident that you can get far better value for your investment dollar elsewhere.
What do you think about XM in 2007? Make your voice heard on Motley Fool CAPS, our free community-investing database. Simply vote XM "outperform" or "underperform" relative to the S&P 500. The stock gaining the most "underperform" votes will get the award for being The Worst Stock for 2007. Follow this link to get in the game.
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Inside Value chief Philip Durell owns none of the companies mentioned. eBay and Amazon are Motley Fool Stock Advisor picks. XM is a former Rule Breakers pick. The Fool has a disclosure policy.
