Remember back in the old good days when satellite radio was hot? Any time an automobile company would announce the inclusion of an XM radio or a Sirius (SIRI) radio (the two companies were separate entities back then), its stock will race to the moon. Never mind that the radio was coming with a free six-month subscription that a big chunk of motorists would never renew. The rest is history. Sirius XM's stock caught up with fundamentals, dipping below one dollar, before recovering to the current $3 level.
Now Sirius XM radio is facing a new challenge. According to an article published in today's Wall Street Journal, beginning 2014 General Motors (GM) will equip new cars with dashboard broadband devices - a move that other automobile makers contemplate. This means that drivers can download everything from weather channels to sport channels, traffic channels, and music channels. Where the satellite radio will be in this universe?
It is hard to say. What we can say, however, is that satellite radio, e.g., from Pandora (P) will have plenty of competition that may undermine Sirius' recent rebound that has helped the stock gain 55 percent in the last twelve months compared to the 18 percent of S&P 500. Not bad for a fallen Wall Street angel. What should investors do?
It depends on the investment horizon and the risk tolerance of each investor.
Short-term oriented aggressive investors may want to stay with the stock, especially after the recent favorable Copyright Royalty Board ruling, a decent earnings report (especially on the revenue side), and good technicals and fundamentals:
1. A bullish technical chart -- the stock trades well above its 100 and 200-moving averages.
2. Improving financials. Profit margins have jumped from 9.2 percent a year ago to 24.03%, according to the most recent earnings report; Total/Debt to Equity dropped from 492 to 71.73; and the company has plenty of cash at hand.
Sirius XM Radio
Quarterly Revenue Growth
Quarterly earnings growth
Total Debt/Equity (mrq)
*Fye Dec 30, 2013; Source: Yahoo.Finance.com
Long-term investors, however, should search for better investment opportunities, as the company will face three challenges: First, a technology challenge. With the rapid change in broadcasting technologies, and the Internet radio gaining ground, it is a matter of time before satellite radio becomes obsolete.
Second, an economic challenge. Satellite subscriptions are part of consumer discretionary spending -- which is usually negatively affected by a weak economy.
Third, a content challenge -- as is the case with other broadcasters and content distributors, satellite radio is at the mercy of content producers enjoying oligopolistic power.
The Bottom Line: In the short-run, Sirius is a "fallen angel," which conservative investors may want to pick up with caution. In the long-run, Sirius is a "falling" angel, which conservative investors must let resume its fall.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.