The following article is part of The Motley Fool's "Stock Madness 2005," a contest based loosely on the annual NCAA College Basketball Tournament, a.k.a. March Madness. From March 17 to April 8, our writers and analysts will engage in head-to-head competition with each other, advocating and arguing on behalf of 64 stocks we've selected as among the most interesting to Foolish investors. You, dear readers, are the fans and referees -- you'll read these exciting duels and then vote for the stock you think is the better investment...and should therefore move on to the next round of play. The company that survives six "games" will be our tournament champion, and its writer our most valuable "coach."
But, please, make no mistake -- "Stock Madness 2005" is a GAME!
Our writers are doing this for fun. They are enjoying the spirit of competition and the art of debate. They are delighting in the search for positives in the companies they've drawn...and negatives in the companies they're pitted against. They are NOT necessarily recommending these stocks as the ones they believe in above all others. As ever, YOU must decide whether the stocks we're writing about -- winners and losers -- are deserving of your investment dollars.
Apple Computer (NASDAQ:AAPL)
Cupertino
, Calif.
$41.89
52-week low-high: $12.75-$45.44
$33.32 billion market cap
By Bill Mann (TMF Otter)
Down to the Final Four, and a matchup I expected and rued from the outset. Apple vs. Sirius.
Let's be honest; Tim Beyers and I could list dueling recipes from our mamas' cookbooks and people would still turn out in large numbers to vote for "their" company. So the question thus becomes:
Are Apple's crazies more devout than Sirius'?
I say that they are. I also think that Apple's shareholders have some real built-in advantages over Sirius' shareholders. Let's start at the top.
Sirius' revenue run rate: $100 million
Apple's revenue run rate: $14 billion
(Apple's revenues are 140 times that of Sirius.)
Apple market capitalization: $35 billion
Sirius market capitalization: $7 billion
(Apple's market capitalization is only five times that of Sirius.)
Apple's annualized earnings: $1.2 billion
Sirius' annualized loss: $1.1 billion
(Apple's earnings soared on higher revenues; Sirius' losses soared on higher revenues.)
Cash balance per share for Apple, net of debt: $7.86 (18% of share value)
Cash balance per share for Sirius, net of debt: $0.08 (1% of share value)
(The only thing that increased faster than Sirius' revenues last year was its long-term debt.)
Yes, yes, Sirius is growing very quickly. It had better, given the assumptions that the share price has built in to it today. The growth from Howard Stern is already priced in. The growth from the NFL is already priced in. The growth from every programming feature that Sirius paid to bring in-house is already priced in, as are its original equipment manufacturing deals. Sirius investors are paying today for a whole pile of maybes, including a belief that their extraordinarily expensive investments in programming will pay off vis-à-vis their competitor, XM Satellite Radio (NASDAQ:XMSR). The hurdle rate on the Stern and NFL contracts alone are mind-boggling, as is the company's one-year share dilution of almost 50%.
Want to know what the expected outcome for investors buying a whole pile of maybes is? The average historical return on the stocks that exhibit the highest growth rates and highest multiples is -5% per year. To buy growth well, you must be buying growth that the market has not already assumed. When I see the responses from the average Sirius investor, I don't believe that this is a concept that is anywhere near their grasp. They see the growth. They're excited. They mount no marginal argument as to why the growth will be greater than what is currently assumed in the price. Given this, I put the odds that they've gotten their risk/return calculations in the right place as being overwhelmingly slim.
Fortunately, in the stock market, such arguments, such overwhelming odds, don't seem to matter for long periods of time. Sirius is going to be a fine little company. Its service is great. It isn't the "next" anything, unless you mean the "next company that people will look back at and believe that it was obviously overvalued."
Apple's earnings and its revenues are positively correlated, growing rapidly, and subject to the company's continued ability to release products that are as functional as they are iconoclastic. It has products that are increasingly capable of selling other Apple products and services because of their high level of interoperability. Its customer base is fanatical and growing, and the number of transactions per customer is skyrocketing. Apple is able to sell an armband for $29. That's 2 1/2 months' worth of Sirius service on a little piece of fabric. That's awesome.
And frankly, Tim, my zealots are far superior to yours.
Bill Mann does not own shares of any company mentioned in this article.
Sirius Satellite Radio (NASDAQ:SIRI)
New York, N.Y.
$5.50
52-week low-high $2.01-$9.43
$7.25 billion market cap
By Tim Beyers (TMFMileHigh)
Finally, it's time for the clash of the titans in this tourney: Apple vs. Sirius.
OK, I admit it: Apple computers rock. But let's be honest. You don't really think Apple investors are less zany than their Sirius brethren, do you? If so, I've got an e-mail folder full of missives that says you're wrong. For example, when I suggested that Apple pay a dividend, a reader skewered me for conning him into selling his shares. And when I suggested Apple's stock split was meaningless, another wrote to tell me how Apple's late '90s spilt benefited him. How, you ask? The price went up, of course.
Pronouncements like these are the investing equivalent of declaring you like a good steak and that your birthday is in September. The two simply don't correlate. And neither does Apple the company with Apple the stock.
Remember: To get to Street projections of $60 per share, you've got to assume 90% growth. That's probably achievable this year. But how about in 2006? 2007? Apple's stock is priced as though it had already invented the next big thing after the iPod. (Sorry, the Mac Mini isn't it.) And don't talk to me about market share gains. PC market growth is anemic and slowing. Apple would have to become Dell (NASDAQ:DELL) to justify its share price at these levels. It won't happen. But hiccups will, especially when a strong competitor to the iPod is introduced. When that happens, look out below. Apple's stock price will sink faster than the Titanic.
Bill is going to tell you that Sirius, too, is overpriced at current. Fair enough. But the satellite radio market is projected to keep growing by roughly 50% annually. And while most of the U.S. already has a computer, less than 2% of the population owns a satellite radio. That wouldn't mean much except that a recent New York Times article pegs terrestrial radio's listening population at 230 million. Cable and satellite TV subscribers -- the same group most likely to ante up for Sirius service -- checks in at 90 million. That's tens of millions of people likely to bring Sirius recurring monthly revenue for years to come. Apple's current run ends with the iPod. That's why I'm asking for your vote.
Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in the story at the time of publication. You can find out what is in Tim's portfolio by checking his Fool profile, which is here.
Rebuttals
Funny Tim should come up with the 50% growth rate for Sirius. That number matches exactly the share dilution the company had over the last year. Tim doesn't address share dilution. Nobody does. So I'll ask the question: What good is growing 50% when you dilute 50%?
Sirius has a long history of bone-crushing dilution. And given that the company ramped up its debt by more than 200% in 2003, the breathing room it got by diluting shareholders by 92% in 2002 is officially gone.
As for Apple, Tim forgets that there were viable competitors in existence before the iPod came out. It became the standard, and given the inability among industry participants to agree on interoperability, its position as such is consolidating. Great, so Apple might not grow to the level that Sirius will.
Look at those statistics above. Guess what? It doesn't have to. It's like the two guys running away from a bear. The first one despairs, "We can't outrun a bear!" The second says, "I'm not trying to outrun the bear. I'm trying to outrun you."
Dear Sirius: Enjoy the bear. -- B.M.
Zealots are zealots, Bill, and Sirius' aren't stupid. The company is priced today as if it had 4.5 million customers. But even the most conservative estimate predicts 13.9 million subscribers by 2010. That's a triple.
Yeah, I know, Sirius has diluted shareholders like crazy in the past. No longer. The company just got $250 million in credit to refinance its highest rate debt and has plenty of cash left over. That's telling from a company that has a history of going back to the shareholder well.
And what happens when the iPod is i-gone? Apple can't sell the little white boxes like crack cocaine forever. Yet investors act as though it will. By contrast, Sirius' growth path is clear, and its valuation holds much promise long-term.
Remember, Fools: Apple needs to grow owner earnings 90% to meet the Street's pie-in-the-sky predictions. That's one new Next Big Thing every single year. In other words: Bill is hoping you'll bet on what hasn't yet appeared on the drawing boards in Cupertino. Show him you're smarter than that. Vote Sirius. -- T.B.
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