Do Strong Numbers Outweigh Red Flags?
Saturday - 11/17/2012, 10:14am ET
Perhaps no other technology business sends more conflicting signals to prospective investors than Sirius XM . What with positive performance results, ambiguity surrounding the consequences of its potential acquisition by Liberty Media and uncertainty regarding its future, the satellite broadcasting company seems to offer investors a chance at unrealized value.
Though I believe that this prospect does exist, I am not yet ready to put my money in Sirius XM. What encouraging evidence the company offers, simply doesn't outweigh some of the red flags and major unanswered questions that I believe the business faces in the near term.
The good
What's most tempting about Sirius XM is its positive performance. In its Q3 2012 conference call, the company announced that it enjoyed record net subscriber adds of 446,000, or a 34% increase in subscriber growth from last year's third quarter (a company record). Year-to-date Sirius XM has added 1.5 million new subscribers which is 27% more than the amount the company added in the first nine months of 2011. More heartening still was news that the company reported its highest quarterly average revenue per unit (ARPU), best adjusted EBITDA margin and that it would exceed subscriber guidance for 2012. With the stock trading at around $2.80 and analyst projections placing its mean target price between $3.10-$3.20 it would appear that Sirius XM has a 10-15% upside just in the near term. While many have suspiciously attributed Sirius XM's particularly strong performance to equally exceptional auto sales, I believe a decrease in automotive growth will not significantly impact the company's performance in the short term, nor over the next two to three years given its robust partnerships and historical dominance in the space.
All that said, these positive results and trends do not sway me enough to make me get out my wallet and invest. Indeed, I have two major concerns.
Liberty Media acquisition
First, I believe the Liberty Media acquisition represents an unacceptable amount of risk and uncertainty. In August of this year, the media conglomerate filed an application with the FCC stating its intention to acquire more than 50% (it currently owns about 48%) of Sirius XM. Though I believe that Liberty Media's need to purchase additional shares will create short-term positive pressure on Sirius XM's current share price, I don't believe there is enough evidence to say that the overarching acquisition will create affirmative long term benefits for investors. On the contrary, Liberty Media has a history of acquiring companies for their assets and then spinning them off to shareholders for a profit; it did so recently with DirecTV (DTV) in 2009.
With Sirius XM's net operating losses valued at $8 billion and its market cap at $7 billion, the company's failures are actually worth more than its successes. Moreover, I think it's critical for prospective investors to understand that if Liberty Media successfully completes its acquisition of Sirius XM, the conglomerate's chairman John Malone, will be the majority shareholder. This means Malone will be committed to making sure he benefits from the stock's premium before all other shareholders, and make no mistake, Malone is a shark.
If this isn't a big enough red-flag to give prospective investors pause, consider that current Sirius XM CEO Mel Karmazin plans to step down on Feb. 1, 2013. Karmazin told the press that "Liberty does not need me at the company." To me, hearing this news is perhaps even more troubling than a consideration of Liberty Media's somewhat self-serving acquisition history. Indeed Karmazin took over the reins at Sirius XM at the height of the financial crisis in 2008 and has done nothing but a stellar job of putting the company back on the right track.
No Signs of Adopting IP
My second major concern preventing me from investing in Sirius XM stems from the company's lack of ability to generate any kind of significant revenues from internet based radio. I think the satellite radio provider is mislabeled a monopoly. Just because its merger with XM in 2008 allowed the two pioneers to own the satellite radio market, doesn't mean that Sirius XM isn't losing out on prospective new subscribers to internet radio companies like Spotify or Pandora .
This is critically important because the world is turning mobile. Companies like Apple (AAPL), Samsung (SSLNF), Microsoft (MSFT) and Google (GOOG) are providing software and hardware to more and more people than ever before that allow them to access radio and music content via the internet and their mobile devices. It also means that Sirius XM is foregoing subscribers that access radio content through channels owned by these very same technology companies such as iTunes and YouTube, or to other competitors that provide audio entertainment via devices like the iPod, or through applications built on mobile operating systems like Android.
