I fear that publicly airing my bearish feelings about Sirius Satellite Radio
Sirius's rabid fans and investors are as good a way as any to start off my bearish argument. Any company that has a huge stable of "fans" runs the serious risk of becoming overvalued. Continuing to bid a stock higher is the way fans show their love, not their logic -- and boy, have they ever. Sirius sports a $7.5 billion market cap, some of which got tacked on during the run-up to Howard Stern's first appearance on the service.
Sirius has been operating at a loss for quite a while, and that won't change anytime soon. Sirius' bright spot is revenue growth -- a 302.4% increase over the last 12 months (through September). However, that's about where the bright spot fades in my opinion, considering the company needs all of that and more to keep its business going. It's common practice to gauge unprofitable companies by their price-to-sales ratio; Sirius has a P/S of 40, compared to just 12 for its rival XM Satellite Radio
Acquiring subscribers is job No. 1 for both Sirius and XM right now, so here's another thing to consider: Sirius is still paying a heck of a lot in subscriber acquisition costs. Last quarter, those costs increased 46%, to a whopping $149 per subscriber. Although Sirius said those costs will decrease in the holiday quarter, it expects subscriber acquisition costs to continue to increase in the future. To put that into perspective, consider that XM only paid $53 for each new subscriber in its most recent quarter.
Sirius still looks like a risky investment when you consider that it plays second fiddle to market leader XM, which boasts 6 million subscribers to Sirius' 3 million. XM is a Motley Fool Rule Breakers selection to boot, and it recently made a huge coup by signing Oprah Winfrey for a mere $55 million and half of ad revenues for the next three years. That deal proved that XM can drive a better bargain than Sirius did with Howard Stern and his five-year, $500 million contract.
Sirius may have crowed about landing the self-proclaimed "the King of All Media," but Oprah Winfrey is royalty in her own right, perhaps even more so than Stern. Oprah's TV show has a huge following -- 50 million viewers, according to Nielsen -- mostly consisting of women, a valuable demographic with a lot of buying power. (Do you think many female Oprah fans will be amenable to their partners purchasing a Sirius radio over an XM model now? Think again.)
Oprah was named the world's most powerful celebrity by Forbes last summer, and you can't deny the power she has to put classics back on bestseller lists, shame authors who lie in "memoirs," and bump up interest in any product she publicly adores and endorses. (While it's not guaranteed that she will promote XM on her show, her alliance with the company is its own kind of endorsement). Meanwhile, I'd also argue that Oprah's fans aren't likely as Howard's to try to download shows on the Internet through file-sharing sites -- a recent development that has Sirius hopping mad.
Granted, my dueling partner Rick Munarriz pointed out an important angle to this story: It's not like Oprah is leaving her TV gig altogether, in contrast with Stern's absolute defection from Viacom
I respect the idea that the satellite radio companies offer a compelling and exciting product, and they have definitely been part of the disruptive forces influencing music these days. However, I can't back Sirius. Valuation concerns aside, I believe XM has some clear advantages when you compare the two. I advise against getting serious about Sirius.