I told you I'd be back, satellite-radio bulls.
I skewered Sirius XM Radio
1. Sirius XM has cornered the market in premium radio
I have compared Sirius XM to DirecTV
DirecTV and DISH are far more profitable at the moment, but that may change -- on a profit-margins basis -- as Sirius XM comes into its own.
See, Sirius XM has a monopoly when it comes to satellite radio. DISH positions itself as the price leader, and DirecTV boasts about its high-def channels and exclusive access to the NFL's Sunday Ticket, but they are ultimately susceptible to what one another and the countless cable and telco providers are offering.
Between the local cable company and the aggressive marketing on behalf of AT&T's
Sirius XM is simply competing against itself, so it has some unique pricing flexibility. The elasticity isn't infinite, but the company was able to initiate a 15% increase in the form of a new music royalty fee last summer and still tack on net subscribers in each of the four subsequent quarters.
There are unlimited music-streaming services and premium options for online radio, but Sirius XM remains the unchallenged provider of pay radio -- and there is no greater competitive advantage than being the sole survivor.
2. Content cost controls
When it comes to programming costs, Sirius XM controls its destiny. This isn't cable television, where service providers have no choice but to keep up with perpetually escalating ransoms from networks and broadcasters.
Sirius XM will naturally need to pay up for sporting leagues, but it's really only competing against itself now. There will be big-ticket deals for Howard Stern and Oprah Winfrey -- and listener demand for Sirius XM to carry popular networks -- but Sirius XM has surprising flexibility here.
Many of Sirius XM's channels are proprietary music and talk brands. This is a significant advantage, especially now that economies of scale related to the merger between Sirius and XM can truly be milked.
Naturally, this doesn't give Sirius XM carte blanche in cutting corners. The end product still has to be intrinsically valuable to the subscriber. However, this isn't a cable provider whose accounts would take a battering ram to its offices if it ever ran late on its payments to ESPN, CNN, or MTV.
3. Thank heaven for billions in cumulative losses
Now that Sirius XM is profitable, we can begin discussing a little something called tax-loss carryforwards. Past losses can generally be used to offset the tax sting on future profits. In a nutshell, Sirius XM will be able to largely avoid Uncle Sam through billions of future profitability.
Sirius XM's bloated share count will keep earnings in check on a per-share basis, but at least more of its pre-tax profits will make it to the bottom line as a result of this accounting leveler.
4. Evolution isn't just around the corner
Mobile connectivity is a legitimate threat, but automakers will continue to promote satellite receivers because they're incremental moneymakers.
The popularity of smartphones may eat into subscriber growth -- especially as network speeds improve and grow more reliable -- but there will always be room for satellite radio. Blu-ray didn't kill the local multiplex. Microwave ovens didn't nix the casual-dining industry. Technologies can peacefully coexist.
If you want proof, check out terrestrial radio. Dead, right? Well, not exactly. Despite the satellite-radio migration and popularity of dashboard audio jacks and Bluetooth, many conventional AM and FM operators are bouncing back.
Want even more proof? Sirius XM announced this morning that it tacked on 583,000 net subscribers during the past three months, closing out the quarter with a record 19.5 million radio buffs. Thanks for making my bullish argument that much easier, Mel Karmazin!
There are clearly more smartphones in the marketplace than there were a year ago. Audio options in new cars have expanded over the past year. Despite all of this, Sirius XM has grown its subscriber count in each of the past four quarters. Mobile connectivity and satellite radio aren't mutually exclusive.
5. The bears are still out there
There were 227.8 million shares of Sirius XM sold short as of mid-June, the largest bearish constituency in over a year.
Color me contrarian, but I love stocks with large short positions. Being short a company with decaying fundamentals may be a no brainer, but all of the recent news out of the Sirius XM camp has been positive.
Even before this morning's healthy subscriber-count figures, Sirius XM has been consistently growing its user base over the past year. The satellite-radio star is now profitable. It recently upped its guidance. Regardless of the somewhat legitimate valuation concerns, you don't bet against a company that has largely been a steady trickle of good news over the past year and change.
Short squeeze or not, it's hard to argue that Sirius XM won't be in a better place a year from now than it is today -- just as it's in a much better place now that it was last summer.
Are you bullish or bearish on Sirius XM? Share your thoughts in the comments box below.