So you think that Sirius Satellite Radio
Sirius committed a disservice to its investors a few years ago when it sorely diluted shareholders in more desperate times, eventually bloating the share count to more than 1.3 billion today.
The company has posted loss after loss in the past, and will do the same tomorrow and at least for another year or two.
Sirius got a late start on its only competitor and continues to trail by a wide margin despite commanding a comparable market cap.
Did I leave anything out? I sure hope so. If not, this may be one of the easiest bullish cases that I will ever have to make. OK, so maybe I did that to rattle the nerves of valuation purists. I realize that I have a unique challenge this week. I'm taking a battering ram to conventional metrics, and many of the folks on my side type in incomplete -- and sometimes incomprehensible -- sentences on unwashed discussion boards. Many in my crew of rabble-rousing Sirius Heads can't even contract "you" and "are" correctly. Forgive them for their lack of grace and diction, but they couldn't be more right when it comes to Sirius, even if they are sometimes grammatically wrong.
See, it's hard to find the kind of duopoly that XM Satellite Radio
XM and Sirius own the satellite radio spectrum. What are the alternatives? Terrestrial radio? Give me a break. One sample of the commercial-free quality of coast-to-coast digital music coverage and you'll never go back to ad-laden, repetitive drivel on traditional radio. Even as companies like Clear Channel
Internet radio? It's bold in spunk and spirit but mild in streaming quality and portability. iPods and other digital music players? Nice, sure, but they are simply whetting the appetite for the new music discovery process and revival of audio entertainment that plays right into the satrad billfold.
Satellite radio also has something significant over its televised brethren -- content. While cable and satellite television providers license broadcasting deals, Sirius owns a good chunk of the content. That is going to make a huge difference once Sirius turns the corner of profitability given the fact that the bulk of its operating expenses are fixed overhead costs. In short, scoff at the red ink now (even though Sirius has lost less than analysts had expected over the last two quarters). When the black ink flows, it will be a gusher.
A year ago, XM expected to close 2010 with 20 million subscribers. A lot has changed since then. XM went on to revise its targets higher, and this past quarter it was Sirius signing up more new subscribers than XM.
Perhaps that's why Jupiter Research now claims that XM and Sirius will have an installed base of 55 million receivers come 2010. With XM's once-significant lead narrowing, let's say the companies split the difference come 2010. That means that Sirius may be commanding about $4.3 billion in subscription revenue in five years.
But hold it a minute. Is $12.95 a month the ceiling? That's unlikely, especially given the heady creep in my cable bill over the years. Sirius will be making more than that off the average subscriber, and with an audience that large, the non-music channels that do sell advertising are going to be raking in significant sums as sponsors try to reach the high-net-worth people who own satellite radios.
Improving technology in the receivers also means that there will be a little more pushing and pulling along the way. Folks should be able to order digital downloads of songs they like or request sponsor information or even engage in e-commerce transactions. That kind of fat margin interaction is something that I have never seen a bear plug into a valuation model. Cynics also don't seem to have much of a value pegged to the ability of XM and Sirius to stream video. It may not be the richest quality, but the applications and value proposition are substantial.
So is Sirius overpriced based on trailing results? Definitely. Are the shares overvalued based on forward financials? Probably. Is there anyone who can unequivocally state that a company like Sirius won't be paddling through deep revenue streams in a matter of years and won't be valued significantly higher? I doubt it.
XM was recommended to Rule Breakers subscribers last year on the merit of the satellite radio industry as a whole. I should know. I was the one who made the recommendation. Things only get brighter for the industry and both of its players. That Jupiter Research study from November claiming 55 million receivers in place? Two years ago, analysts were expecting 20 million at best. I like that. Sure, a company like Sirius is spending a great deal of money now in customer acquisition, but if the future is half as bright as I think it may be, it will be as big a bargain as that slapped on Sirius shares at the moment.
By the way, as a note to my fellow Sirius Heads, "you" and "are" are contracted as you're -- not your. If you're feeling more contractions than that, grab an epidural, because the mother of all bull rebuttals is on the way.
Longtime Fool contributor Rick Munarriz has been a Sirius subscriber since 2004 but does not own shares in any of the companies mentioned in this story. T he Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.