Why Does Wall Street Hate Sirius XM?

A week ago today, Sirius XM Radio (NASDAQ:SIRI) should have deflated the last of its critics. The satellite-radio juggernaut delivered head-turning results for the third quarter. It posted breakeven results for the first time in its red-inked history. It posted a sequential gain in subscribers for the first time since last year.

Trading at $0.61 before the blowout quarter, the stock popped to open at $0.65 on the news -- hit an intraday high as $0.69 -- before closing at $0.64.

The stock has been meandering ever since, though a refreshing Standard & Poor's credit upgrade last night has pushed the stock to as high as $0.67 a share this afternoon.

Few will scoff at a 10% gain on a percentage basis over the past week, but many would argue that the upbeat developments deserve a more robust ticker tape parade.

This was a company that was on the brink of bankruptcy in February, and now S&P is upgrading its credit -- from "stable" to "positive" -- to quell any cries of a near-term financial demise. This is a company that is forecasting adjusted operating profits to grow 20% next year, and that's on top of the more than $400 million that it is looking to ring up this year.

What's it going to take to get a little respect around here? Let's go over a few of the scenarios.

A penny for your institutional-investing thoughts
Mutual funds and other institutional money managers are reluctant to purchase shares trading for less than $5, much less pocket change. Individual investors have served Sirius XM well during last year's downturn -- and have profited handsomely from this year's bounce -- but they may not be enough to push the stock up to levels where fund managers are comfortable buying in.

Sirius XM's problem here is that it has too many shares outstanding. There were 3.6 billion fully diluted shares outstanding at the end of the third quarter. That doesn't include Liberty Capital's (NASDAQ:LCAPA) stake. Liberty owns 12.5 million preferred shares that can be converted into a 40% position in Sirius XM. As of right now, each preferred share is good for nearly 207 common shares -- or a total of nearly 2.6 billion more shares.

How high do you think Sirius XM's stock can climb when revenue and future profits will be divided into 6.2 billion shares?

If satellite television providers DISH Network (NASDAQ:DISH) and DirecTV (NYSE:DTV) had to divide their market caps by 6.2 billion shares, we'd be talking about stocks priced at roughly $1.50 and $4.50, respectively.

And let's be realistic. Anyone that argues that Sirius XM deserves DirecTV's market cap is ignoring that DirecTV is consistently profitable and generating more than eight times Sirius XM's revenue.

A reverse stock split is not a popular solution to skirt Nasdaq's delisting threats, and it may not be necessary if Sirius XM can get its stock over the buck mark next year. However, even if Sirius XM somehow appreciates beyond that -- a buck and change may still not be enough to appease fund managers with minimum price thresholds. A reverse split may be the ticket into the hearts of institutional investors who like the Sirius XM story but have a hard time justifying the purchase of a $0.66 stock to their clients.

Given the recent success of reverse split graduates Priceline.com (NASDAQ:PCLN) and AIG (NYSE:AIG), the stigma of a reverse may also wearing off.

Plan B and beyond
If reverse stock splits are out, Sirius XM is going to have to grow substantially, ideally generating high-margin profit opportunities along the way.

There is certainly hope on that front. Sirius XM broadcasts to 18.5 subscribers. We're talking about a sizeable chunk of the population that is comfortable in paying what is now $15 a month for premium radio. They have discretionary income. They're moving around. It's a marketer's -- or a milkmaid's -- dream.

This is ultimately the key for Sirius XM, since there isn't a lot of material upside in rate hikes or subscriber growth. This isn't a company that will have 37 million subscribers paying $30 a month in a few years. No, this is a model that may have matured on the subscription front, but can kick it into a new gear with incremental opportunities.

One of the bigger disappointments at Sirius XM is that advertising revenue per user has been shrinking lately. The lackluster economy isn't helping, but this is hopefully something that the next generation of interactive satellite receivers can fix.

I'm not just talking about the obvious Apple (NASDAQ:AAPL) iTunes tie-in, where folks can tag songs they like and purchase them. Two-way receivers that allow subscribers to request advertiser information -- and possibly even make purchases -- will open new revenue streams at Sirius XM. Can you imagine a shopping channel on satellite radio? Knowledgeable shoppers don't need the visuals. This can work.

There are also other areas including channel sponsorships, genre compilations, terrestrial syndication, and social networking where Sirius XM has barely scratched the surface.

Congratulations to Sirius XM for breaking even last week, but now it's time to break it wide open. Institutional respect and shareholder gains are waiting at the other end of dreams fulfilled. Can you live with that, bulls? Bears, can you afford to stand in the way?