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Did Sirius XM Peak at $2.42 Yesterday?

By Rick Munarriz - Updated Apr 6, 2017 at 9:54PM

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The satellite radio giant has come a long way in a short time.

When shares of Sirius XM Radio (Nasdaq: SIRI) barreled past the $2 mark just two weeks ago for the first time in nearly three years, it was easy to begin targeting $2.50 as the next barrier to fall.

Would it happen after a few strong quarters? Would the retail release of Sirius XM 2.0 during the fourth quarter make it happen? Would $2.50 come in months or years? Well, it was almost a matter of weeks.

The satellite radio giant orchestrated its own luck last week, overcoming a first quarter report that was originally panned by Wall Street until CEO Mel Karmazin all but promised that a rate hike was in the cards during its conference call.

The past few scintillating days took the shares all the way up to an intraday high of $2.42 yesterday before falling back to a close of $2.30.

When cynics attack
Bearish valuation hounds have to be spinning in their short squeeze graves. How did this happen? At $2.42 -- with 6.5 billion shares outstanding -- we're talking about a market cap of nearly $16 billion. Tack on the company's net debt and its enterprise value tops $18 billion.

Sirius XM is barely profitable. It is growing slowly, targeting single digit percentage growth to hit $3 billion shortly. It's not even a speedster within its realm of satellite-fueled subscription services.

Analysts see DIRECTV (NYSE: DTV) growing faster than Sirius XM this year, on chunkier profit margins to boot. If the leading satellite television provider trades at an enterprise value that is twice its top-line performance, why is Sirius XM fetching a multiple of six? Dish Network (Nasdaq: DISH) is the silver medalist in satellite television. It's not growing as quickly as DIRECTV or Sirius XM, but it's trading at an even lower multiple than DIRECTV.

If shorts have been nodding along during the past two paragraphs, now would be a good time to pull the rug out from under their tired feet.

A hike in Sirius XM's monthly rates -- you see -- changes everything. Because most of the increase would work its way down to Sirius XM's bottom line, this "barely" profitable company would become a "very" profitable company. Single-digit growth would become double-digit growth.

Realistic expectations
Sirius XM has kept its primary rate of $12.95 a month intact since completing the merger between Sirius and XM three summers ago. It was a voluntary freeze that helped regulators clear the controversial combination.

How high will Sirius XM be able to go? Will it happen right away this summer? What kind of impact will this have on cancellations?

The answers to all three of these questions will dictate whether Sirius XM is trading sharply higher or sharply lower in a year or two. Anyone who claims that Sirius XM is ridiculously cheap or insanely expensive at this point is simply guessing on the responses.

Let's deal with facts. Not every penny of Sirius XM's inevitable rate hike will trickle down to the bottom line. It's true that Sirius XM has billions in tax-loss carryforwards that will offset tax liabilities for years, but we can't ignore the record labels. Sirius XM pays the music industry a gradually escalating percentage of its revenue -- unlike the flat music royalty fee that more than half of its subscribers are now forking over.

We also can't simply multiply the rate hike by the 20.2 million active subscribers, as tempting as that may seem to be. Sirius XM charges $12.95 a month for its basic plan. Some users pay $16.99 for the "best of" packages that include exclusive content from specific providers. Receiver-based subscribers can pay an additional $2.99 a month for streaming through the Internet or their Android, iPhone, or Research In Motion smartphones. The monthly music royalty fee was marked down from $1.98 to $1.40 five months ago. Juggling all of these options, one would think that the average subscriber is paying about $15 to $16 a month for the service. Nope. Average revenue per subscriber clocked in at $11.52 a month during the first quarter, and that includes advertising revenue.

In other words, there are folks paying less per month on longer-term plans and folks not paying anything at all as lifetime subscribers. Second receivers in the same family also set a subscriber back just $8.99 a month. A $3 monthly rate hike can't be multiplied by 20.2 million subs to arrive at $60.6 million a month -- or $727.2 million a year -- in pure profit and not just because of the credit card processing fees and music royalties. However, an eventual annualized impact of $500 million isn't outlandish.

Now that we have to factor in Liberty Capital's (Nasdaq: LCAPA) 40% preferred share stake into the fully diluted earnings, $500 million would translate into less than $0.08 a share on 6.5 billion shares outstanding. It may not seem like much, but it's a material sum for a stock where individual shares can still be bought with the change in your glove compartment.

This also isn't the whole enchilada. It's incremental. Sirius XM's margins should continue to improve regardless of the inevitable rate increase. Net subscriber growth should continue until that point (and we'll see what happens to churn, conversion rates, and net growth after that).

Where's the floor? Where's the ceiling? I wouldn't trust anyone who is dead certain either way.

Where do you think Sirius XM will be by the end of this year? Take a shot in the comment box below and I'll revisit the responses by year's end.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Sirius XM Holdings Inc. Stock Quote
Sirius XM Holdings Inc.
SIRI
$6.25 (3.99%) $0.24
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