While digital radio satellites may know their way around the laws of gravity, it seemed as though shares of Sirius Satellite Radio (NASDAQ:SIRI) were destined to defy its existence. The stock had been on an eye-opening tear over the last two months.
Back in October I wrote about how the company mattered again. It had just signed up Howard Stern to a multiyear, multichannel contract, and despite having a whopping 1.3 billion shares outstanding -- and counting -- it was a worthy candidate for our Rule Breakers newsletter at $3.70 a share.
Yet my optimism for continued near-term gains was put to the test when the stock soared, lapping past the market cap of its larger rival XM Satellite Radio (NASDAQ:XMSR). Yes, I know that with Stern and the savvy hiring of Viacom (NYSE:VIA) radio guru Mel Karmazin it was just a matter of time before Sirius began signing up more digital radio listeners than XM, but that was supposed to be our little secret. The market wasn't supposed to discount that this early in the SatRad arms race.
When the stock lapped the $6.66 mark two weeks ago I warned, tongue-in-cheek, that it was suffering from satanic possession. While I was a firm believer in the company's long-term prospects, it was wrong to ignore both its pricey valuation and the critical concerns posed by some fellow Fools.
Yet the stock defiantly marched higher. Topping out at $9.43 before gravity got the better of the shares, the stock fell sharply on Wednesday after a pair of analyst downgrades. Yesterday the stock closed at $7.17, pricing the enterprise at a beefy $9 billion.
Is satellite radio going to revolutionize the radio industry? Absolutely. Can you pay too much for front row seats for said revolution? Absolutely.
One has to be realistic. I get plenty of anecdotal affirmations in email form. Yesterday someone wrote me that a satellite radio installer at Best Buy (NYSE:BBY) claimed that he was doing three times as many new car installations for Sirius as for XM. I get glowing outlooks from folks back from car dealer showrooms on the success of installed receivers on new model automobiles.
Channel checks rock. Anyone who remembers our early days of Fooldom can recall the spot on optimism for Iomega (NYSE:IOM) and its first batch of Zip drives. Yet the reality here is that even with the NFL in full swing and with Stern pitching Sirius despite Viacom's muzzle, the company has publicly projected that it will sign up only half as many new subscribers as XM will this quarter.
Yes, just yesterday my wife was on strict orders that all I want for Christmas is Sirius. But then there's my brother-in-law, who bought an XM system over the weekend and then got two more for his teen-aged kids in order to take advantage of XM's discounts on additional subscriptions.
As the early adopter columnist in our new Rule Breakers research newsletter, I couldn't be more excited to see early shareholders being rewarded lately in both Sirius and XM. This is going to be an exciting place to be as free radio bites its fingernails to the bone. But just as someone wouldn't overpay for a satellite radio receiver, it's important to pay realistic near-term prices for the satellite radio stocks as well. If your only due diligence is reading a post on a free discussion board that reads "SIRI see $10 by Monday" then you might want to take in some market basics first.
It's okay to get excited about tomorrow -- as long as you understand the lessons and gravity of today.
What will satellite radio really mean to free radio? Is Sirius overvalued? Are you concerned about the huge number of shares outstanding and eventual share dilution? All this and more -- in the Sirius discussion board. Only on Fool.com.
Longtime Fool contributor Rick Munarriz thinks that XM and Sirius will defy the cynics and the skeptics over the coming years. He only hopes that they learn to treat their income statements and balance sheets a little better. He does not own shares in any of the companies mentioned in this story and is a member of the Rule Breakers analytical team.
