Tech is a notoriously dangerous industry to be in long-term. Rapid evolution of technology means formerly solidified businesses can become vulnerable to opportunistic competition like in no other industry. You either stay ahead of the curve or get side swiped and knocked into obsolescence. This is the reality I believe Sirius XM (SIRI) is facing. As such, the following is my condensed short thesis for the company's stock.
You may say - "Take a look at SIRI's subscriber growth, how could you possibly short something with such overwhelming momentum?" My response is simple: growth is priced in; the company's forward P/E ratio is 30; and this naturally assumes that earnings growth is safe and sustainable. My argument is that it is not.
What's the big threat?
Internet radio - and its baby: (the next buzz word that's going to make you want to gag, but at the same time will revolutionize the way you consume audio at home and on the road) "social radio". (More on this in a minute).
It's becoming increasingly plain to see, the moat many people considered Sirius XM to have in automobile entertainment is quickly vanishing. Internet connections are rapidly infiltrating our vehicles. This is happening both directly [please take 84 seconds and watch automaker, Tesla's (TSLA), CEO showing off what an Internet connected car is capable of] and also indirectly as a result of the mobile Internet revolution. I don't think anyone can disagree that our lives are becoming more and more convenient, month by month, as new developments arise everyday in the functionality of our smartphones. This brought to your immediate attention - even if you're not up to date with exactly what's happening in the industry - it should be fairly obvious that music distribution is in rapid evolution mode.
Let's cite a few examples of competitors coming into automobiles over the Internet: Pandora (P), Spotify, Slacker, Songza, 8tracks, Galaxie, Rdio, *the rumored Apple mobile media service ... etc., etc.
Not only are competitive services becoming increasingly accessible on the go, but many of them are simply better (or at least have the potential to be better) in such profound ways. As you can see from that video clip of Tesla's Model S sedan, what you listen to is actually customizable via the Internet and the right software - unlike the centrally planned playlists of satellite radio. Even with the seemingly endless variety of options available on Sirius XM, it's still not the same as creating something (or having something created for you) that suits you individually. Coming back to the concept of social radio - as I envision the future, I have zero doubt the winning service is going to have a remarkable social aspect to it. Just like at home, we use Facebook (FB) and Twitter to filter out the type of content we consume, why not let trusted friends (they're likely your friends because you share common interests) help you decide what you'll listen to in the car? Whether it's a playlist of songs or a list of recommended podcasts, this can be done on the Internet, not through Sirius' satellite broadcasted radio service. If you're a SIRI investor and you don't know what 8-tracks are, please check it out.
In addition to the content side advantages, the business model is also far stronger. Sirius XM has to charge ongoing subscription fees for their service - where Internet radio is actually in position to offer some of the most effective advertising on the planet. The prevailing companies will have the ability target customers not only by preferences (at very least content preferences) but also by location. Imagine this scenario with me for a second: Wendy's (WEN) buys ad space on a certain highway - 5 to 10 miles before an exit that has a Wendy's - for all people who listen to content that is correlated to people who might consider buying fast food on a whim. I can't imagine a more valuable way to advertise than this. Along with content customizability, this is what I believe will give Internet radio the leg up it needs to strip Sirius of its current market dominance.
So the question SIRI investors need to ask themselves is this - "do you believe satellite radio has sustainable advantages to fend off the kind of competitive forces I'm outlining, brought forward by such a massive technological revolution, still in process ... mobile?"
As you can maybe tell, I'm not claiming to know who the music and media distribution winner(s) will be. At this point I don't consider Pandora a worthwhile investment at a $2 Billion market cap ($12.20 a share) even though it looks like a grand bargain next to SIRI's $20+ Billion cap ($3.18 a share). There is just simply too much up in the air to choose a winner at this time. In my opinion, if you're seeing the technology shift that I am, the only reasonable thing to do is pick the loser. With its seemingly risk-free valuation, it makes sense to short SIRI now before the market catches wind of the inevitable. Social radio is the future - don't put your money on a dinosaur like Sirius XM.