I have never felt stronger about the satellite radio industry than I do at this very moment.

I realize that's not a popular opinion. The share prices of XM Satellite Radio (NASDAQ:XMSR) and Sirius (NASDAQ:SIRI) are trading well below their highs. Everything from legal challenges to a doomsday defecting director have roughed up the fundamentals while the competition has strengthened.

I accept that. Yet I still believe.

I'm no Pollyanna. I'm a realist. OK, so I'm a realist with a time machine. Is that so bad? I see a far brighter future for this sector, which has shed billions in market cap since each company's stock peaked in December of 2004.

XM Sirius
3/21/06 Price $21.12 $4.86
December 2004 Peak $40.89 $9.43
% Decline 48.3% 48.5%


I see numbers like 2112 and 486, and I don't think of classic Rush albums or ancient computer chips. I see opportunity. I see a fast-growing industry, now just quarters away from turning cash flow-positive, that's trading for $10 billion less than it did 15 months ago.

The prospects are bright. Competitive fears are overblown. Let's go and slay some myths.

Myth: XM and Sirius are highly dilutive beasts
It's true that XM and especially Sirius gave away plenty in more desperate times to stay afloat. They printed way too many shares early on and were lousy negotiators when it came to handing out stakes to their financial partners. But let's take a look at how each company is holding up these days. Over the past year, the number of fully diluted shares outstanding has risen by just 5.7% at Sirius and 8.2% at XM. That's not unreasonable for companies at this stage in their growth cycles.

More importantly, if you remain a cynic, let's penalize each company for its bloated share count and measure revenue growth per share instead of overall revenue growth.

XM Sirius
2004 Revenue per Share $1.24 $0.05
2005 Revenue per Share $2.54 $0.18
% Gain 105% 260%


Is that so sinful? These companies are growing faster than most of your stocks, I reckon. They have already learned from their past mistakes of pulling all-nighters at Kinko's to run off an insane number of stock-certificate copies. With 1.3 billion shares outstanding, Sirius knows that the road to a double-digit share price will be challenging. That's OK. All of this is already baked in to the prices of companies that are smarter -- and sober -- today.

Myth: Satellite radio alternatives will kill the revolution
I know all about Internet radio, Apple Computer's (NASDAQ:AAPL) iPod, and music-subscription services such as Napster (NASDAQ:NAPS) and RealNetworks' (NASDAQ:RNWK) Rhapsody. I recognize that terrestrial broadcasters such as Clear Channel (NYSE:CCU) won't die without a fight, so they have been ramping up their high-definition-radio initiatives.

I'll even take this one step further by conceding that a music-discovery site like Pandora.com or standalone Internet-radio appliances like the $400 Roku SoundBridge may temporarily quench some of the collective thirst for satellite radio.

Add it all up, though, and it's still not going to get in the way of a satellite-radio industry that has gone from 9 million subscribers to 10 million in the past three months and will top 15 million before the end of the year.

Warring digital-music platforms may actually be fighting on the same side, given that they're combining to reawaken our love for music. Audio will continue to play a bigger part of our lives as they enhance our commutes and computing soundtracks and dazzle us in the 21 hours of the day that don't belong to prime-time television programming.

As far as the spoken word goes, there will be plenty of time for podcasts and Audible (NASDAQ:ADBL) offerings. But satellite radio has the cost structure that can bankroll the A-list celebrity content and thereby dominate our aural lives and drive that "must-have" subscriber growth.

Myth: Satellite radio will never turn a profit
We are now just quarters away from debunking that myth, but let's take this a few logical steps further. Raise your hand if you think that XM and Sirius will be good for only $12.95 a month out of its subscriber base. We already saw some refreshing elasticity when XM raised its monthly rate by 30% a year ago and continued to gain new subscribers. Those hikes will continue, like your cable- or satellite-television bills, but I'm not just talking about that.

The technology that will allow users to purchase songs they hear is already in place, thanks to XM contracting with Napster on a deal for next-generation receivers. That technology will also help the company generate leads for sponsors and sell more wares in the future. In other words, commerce and advertising revenue will only continue to grow for satellite radio.

Both companies are working on streaming video through their excess channels. Whether it's a premium offering or it just raises the value proposition of a stand-alone subscription, it's clearly another revenue stream in the dredging. Premium online broadcasting is yet another area ripe for monetizing.

And that's why even though the companies have the structure in place to turn a profit in the near term, it's going to be even more exponentially explosive in the long term. Unlike television service providers, satellite radio has the advantage of owning a good chunk of its exclusive content and playing a larger role in branding the streaming experience for its own financial benefit.

No myth
Is my time machine playing tricks on me? That's the future I see, but I invite you to take it for a spin to see how things may play out differently. Things like greedy music labels, a Howard Stern-suing Leslie Moonves, and a Chicken Little ex-XMer won't amount to a hill of beans compared with the mountain that satellite radio is piecing together.

That's why I had no problem recommending Motley Fool Rule Breakers to newsletter subscribers a few months ago. With the selection currently in the red, it is dragging down the returns at the moment. But even with XM off a bit, the average pick in the ultimate growth stock newsletter has gained an average of 31%. That's nearly four times more than the 8% average market return in that time.

Yet I stand by XM as a disruptive technology that will vindicate my faith. I would have no problem picking it again. And, quite frankly, now that Sirius has come down to its current levels, I wouldn't mind shouting that Sirius is now a worthy Rule Breaker, too.

This industry is going to rock your world.

Believe it.

To learn more about satellite radio and the other industries where Rick, David Gardner, and the rest of the Rule Breakers team have unearthed market-crushing picks, consider a free30-day trial subscriptionto see whether the ultimate growth stock newsletter will jam with your portfolio.

Longtime Fool contributor Rick Munarriz is a fan of satellite radio and has been a Sirius subscriber since 2004. He does not own shares in any of the companies in this story. The Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.