So let me get this straight. Higher gas prices are weighing down the adoption process of satellite radio? Earlier this week, Bank of America analyst Jonathan Jacoby lowered his price targets on Sirius
To be fair, Jacoby was spot-on in citing other reasons for the sector's slowdown, including reduced marketing expenditures, delays in innovative products, and the gradual fade after Howard Stern's initial media blitz nearly six months ago. There's also the inescapable truth that all hot growth trajectories eventually have to stabilize.
But higher gas prices hurting XM and Sirius? If anything, one could argue that they're actually helping the satellite-radio upstarts.
Pump up the volume
Sure, it hurts to see more disposable income funneled into costlier fill-ups. I can see where some thrifty souls could shave $13 a month from their budgets by simply forgoing satellite-radio subscriptions.
Beyond that, just about every scenario involving higher gas prices seems to play right into the hands of XM and Sirius.
- Pain at the pump finds consumers trading in their larger cars for smaller hybrids. Great. Folks are bringing in cars that they have owned for three, five, or seven years -- before factory-installed receivers were the norm -- and snapping up fuel-efficient rides that often come equipped with either XM or Sirius. Last month, I traded in my old automobile for an XM-stocked car; I've been so smitten by XM that I haven't even bothered to program my FM presets.
- Consumers who aren't buying fuel-friendly cars are curbing their driving habits. This has some observers believing that satellite-radio subscriptions provide a lesser value. Hogwash! If more commuters join carpools, one cool commute enhanced with satellite radio could entice an entire carload of passengers.
- Even if people keep their own cars parked in favor of public transportation, it will only enhance the value of the new wave of portable satellite radio receivers, which often double as digital music players. And when they're not in traffic, subscribers can still listen to streams of XM and Sirius over the Internet at no extra cost.
- New-subscriber revenues from car dealers pale in comparison to those coming from retail channels like Best Buy
(NYSE:BBY). Analysts might assume that the retail space is a more brutal battlefield. After all, instead of the cozy duopoly they enjoy among automakers, the satellite-radio firms must share store shelves with Apple (NASDAQ:AAPL)iPods and countless other MP3 players. But XM and Sirius struck their deals with automakers at a more desperate point in their histories, conceding too much; their OEM and direct sales are actually more lucrative than factory car installations.
Taking the long way home with slow growth
Weakness in year-over-year subscriber growth wasn't evident at Sirius last January, when it was feasting on Stern fans' migration from terrestrial radio. Instead, it showed up at XM, where the largest provider managed to sign up just 5% more net new subscribers in the March quarter than the 541,140 new sets of ears it had bagged in last year's first quarter.
A 102% spike in quarterly revenue helped obfuscate the lull at XM. It stemmed from a 30% monthly service price hike the company initiated last spring, and a healthy holiday spurt that found XM claiming 72% more total subscribers at the end of the period. Yes, for every little number you may see at XM or Sirius, you'll see some pretty big numbers, too.
This isn't just about raw subscribers, although XM and Sirius should still collectively wrap up 2006 with at least five million more total subscribers than they began the year with. Sector salvation is more about embracing what that larger audience means.
Because of the substantial fixed overhead in running a satellite radio service, and the steep costs related to acquiring new customers, XM and Sirius's income statements look awfully bloodshot at present. The low variable expenses will turn that around in a hurry once the companies get over the breakeven bar. Investors can't see that far, even if we're just quarters away from the fiscal Visine. They prefer to carp about satellite radio's high acquisition costs while condemning its slowdown in new subscriptions. Think about that.
Despite the market's skepticism, I don't believe that the medium is merely a cattle call for listeners. I'm more enamored with satellite radio's prospects to maximize its earnings potential as its technology improves. The new portable receivers let listeners hook up with Napster
Maybe that's why Sirius CEO Mel Karmazin plunked down $4.5 million to buy another million shares of his company's stock last month. Maybe that's why Jacoby, despite cooling on XM, still has a price target that represents a 70% premium to its current share price.
I arrived brutally early in this corner of the market. I recommended shares of XM to Motley Fool Rule Breakers newsletter subscribers last year, and the stock has since been battered -- and deep fried. I'm humbled and a bit envious that investors today can pick up shares in a quality company in the teens -- and Sirius for less than a fiver -- after singing XM's praises last year in the high $20s.
Was I wrong then? Ask me again in a few years. Tomorrow is a long way away, I know. Hit me up for a little gas money if you need help getting there.
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Longtime Fool contributor Rick Munarriz loves satellite radio so much that he subscribes to both XM and Sirius. He doesn't own shares in any of the companies mentioned in this story, though. Best Buy is a Motley Fool Stock Advisor pick, while Bank of America is a Motley Fool Income Investor pick.The Fool has a disclosure policy. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.