It's great to be right. Yet being right in the market is often a temporary condition. That's why it's even more important to not be too greedy during those moments when you feel spot on. So maybe my moment of ominous humility came when I pulled up a quote on Sirius Satellite Radio (NASDAQ:SIRI) yesterday afternoon -- it was at $6.66. It closed a few pennies higher. That's just evil, chum.
Back in October, I proposed that Sirius was worthy of being considered for our new Rule Breakers growth stock newsletter. The stock closed at $3.70 a share that day. Yesterday it was trading more than 80% higher.
Yes, I am still bullish on the long-term prospects of the stock. However, now I am more than a little concerned about its near-term valuation. Sirius announced that it had lapped the 800,000-subscriber mark yesterday, and it commands an $8.5 billion market cap. When XM Satellite Radio (NASDAQ:XMSR) hit that mark last summer, it was valued at less than $2 billion. Times change. The sentiment's more chipper. I get that. But then explain to me why now that XM has 2.5 million subscribers, its market cap at $7.5 billion is still less than Sirius' today?
Don't get me wrong. I think that landing Howard Stern and Viacom's (NYSE:VIA) radio guru Mel Karmazin were genius touches that will eventually find Sirius signing up more users than anyone making the SatRad migration. However, we're getting ahead of ourselves if we ignore that even with all of the buzz the signing of Stern and Karmazin has generated for Sirius, it is looking to sign up only half as many new users as XM this quarter.
It's troubling to me when I get emails from people wondering why Sirius can't catch up to XM and be a $35 stock tomorrow. The concept of shares outstanding isn't all that complicated, so it is alarming to see people buying a stock on the premise that the raw share price is lower than that of a different stock. Would these people be buying XM instead if it declared a 10-for-1 stock split? It's a haunting thought.
It's slightly less troubling but still disturbing to see folks who understand that you need to multiply a stock's price by the shares outstanding to arrive at its current market value still ignore the fact that a young company like Sirius also has a ton -- and we're talking literally a couple hundred million -- of additional shares in options and other dilution that will be tacked on as the stock appreciates.
Yesterday an analyst raised his target price on Sirius to $6.75, and that mark was struck just minutes into the trading day. A cautious Seth Jayson wondered last month whether signing Stern was worth $1 billion the day that Sirius announced its $100-million-a-year deal with the notorious radio show host. A billion bucks for Stern? That's peanuts! The stock has actually tacked on nearly $5 billion since Stern came aboard.
Buying into a strong growth stock early in its life cycle is great -- it's the very basis of our Rule Breakers premium research offering. But that should never mean checking logic and common sense valuation at the door. Sirius is going to have a great future, but a cynic would be right to wonder whether it's cashing too many of tomorrow's paychecks today.
Tread carefully.
Has Sirius run up too far ahead of itself, or is it just the beginning? How important will Stern and Karmazin be in setting Sirius apart from XM? All this and more -- in the Sirius discussion board. Only on Fool.com.Longtime Fool contributor Rick Munarriz thinks that satellite radio will be a huge industry in the years to come. He does not own shares in any of the companies mentioned in this story. He is a member of the Rule Breakers analytical team, seeking out tomorrow's great growth stocks today.
