You've heard the old "buy on the rumor, sell on the news" adage. How about sell on the rumor, sell on the news?
That is certainly how things have felt for shareholders of XM (Nasdaq: XMSR) and Sirius (Nasdaq: SIRI). Even with last year's merger announcement and last month's Justice Department approval, shares of the satellite radio providers are trading lower today than they were before each of those positive catalysts came around.
Now even the bulls are turning bearish. Credit Suisse downgraded shares of Sirius on Friday -- from outperform to neutral -- lowering the stock's 12-month price target to $3 from $3.75.
Analyst Brian Kraft is concerned that even if the FCC nods along to complete the regulatory clearance, churn and lower revenue per subscriber trends at Sirius will hold the stock back in the near term.
The long road to redemption
I get it. A combined XM and Sirius won't be an immediate picture of health. The new company will have financing burdens. The nascent industry is also bumping up against the car upgrade cycle. We're not at a point where the industry's first subscribers to XM or Sirius through automaker installation are trading in their cars.
It's not the ideal scenario for XM and Sirius. If owners renew subscriptions on a next car, they're simply replacing themselves on the subscriber count. With a soft economy, many may decide that paying an extra $13 a month is better spent on things like paying for the pricier gasoline to get the car moving instead.
However, what about the other half of the glass? Over the past few quarters, XM has consistently reported that just 52% to 53% of new car buyers with factory-installed receivers continue to pay for their subscriptions after their brief trial plans run out. What does that say for the other 47% to 48%? They, too, will be entering the same upgrade cycle. Isn't that a potential market for growth, even if they rejected satellite radio a couple of years ago? If they're trading in their wheels, won't that mean another trial subscription, with a chance that may actually stick around this time?
We're also now looking at a fleet of used cars hitting the lots with existing receivers. Sure, many will be dormant dashboard ornaments, especially for thrifty drivers who are buying or leasing used cars because money's tight. The flip side of that argument is that these are systems that have already been paid for several years ago. XM and Sirius can attract incremental subscribers with essentially no customer acquisition costs.
Zig when they zag
Whether they're bellyaching analysts or bloggers, I don't see the point in giving satellite radio wedgies. Will subscription revenue contract on a per user basis in the near term? Sure. XM and Sirius have already announced lower-priced tiers. Both companies also provide discounted additional subscriptions within the same family, making it all the more likely that future growth will result in less subscription revenue.
So? As I recently highlighted in discussing both the challenges and opportunities at the united provider, there will also be chances to milk more out of the 17.3 million subscribers -- and counting -- through things like video content, navigational services, and e-commerce.
It's easy to lose your enthusiasm. Even automaker partners like Ford (NYSE: F) aren't helping matters by putting hard drives and iPod jacks into some of their cars. Then again, cable and satellite television providers like Comcast (Nasdaq: CMCSA) and DirecTV (NYSE: DTV) didn't die just because Blockbuster (NYSE: BBI) and Netflix (Nasdaq: NFLX) were delivering rented DVDs to subscriber homes.
There are times when a wealth of alternatives actually enhances the appetite. Is it a concern that many of these alternatives are cheaper, if not entirely free? Yes, but this is where one has to consider the dramatic costs savings that a combined XM and Sirius will be able to achieve.
Why cool on an industry that's just starting to heat up? If you sold on the rumor, why sell at an even lower price on the news?
Here are some other recent XM stories on its long courtship with Sirius:
