My previous article, which raised the idea of advertising on the music channels of Sirius XM (NASDAQ:SIRI), did not sit well with 99% of the people who read it. The idea was accused of being superficial - a heretical thought that provoked derision from the SIRI experts here at SA. Nobody can really predict the industry trend, however unlikely it is now or in the near future. Sirius XM's no-commercial policy on its music channels or free trial broadcasts may not hold true forever.
I would like to start a new topic that concerns Sirius XM. Based on an article I just read, there are apparently more than 300 million SIRI shares that are in short position. The author, Paul Ausick, even described Sirius XM as America's most heavily shorted company.
I believe Ausick's statement has merit based on the chart I found at NASDAQ which showed that SIRI has 302,855,370 shares sold short. Short Squezee.com also put the number of shorts at 302,855,400. Both sites put the average days to cover at seven days.
The 302.86 million shares on short interest represent 9.7% of Sirius XM's total 3.1 billion shares on float. I believe in the long-term viability of Sirius, and I understand that it currently has an outstanding pay-for-premium-content-subscription model. However, this revelation that there are almost 10% of floated SIRI stocks being aggressively shorted for most of 2013 cannot be ignored.
Pandora Has Few Short-Sellers
The long term short-squeeze on SIRI is a big surprise considering that its money-losing rival, Pandora (NYSE:P), has not only enjoyed a tremendous $194.23% YTD increase in its stock's price, but also is almost free from heavy short-selling. The average short interest on Pandora is less than 8 million shares for the last 12 months or so.
Consistent Short Squeeze Because SIRI is Overvalued At The Moment?
Based on its December 18 closing price of $3.47, SIRI has a current P/E ratio of 47.55 and a market cap of $21.30 billion. If the constant short-selling of SIRI is taken into account, there's a substantial disbelief that Sirius XM can deliver its projected Forward P/E of 29.42 for December 2014. The high P/E ratio has given short-sellers a strong motivation to keep pounding on SIRI.
Sirius XM's stock price has a YTD increase of only 14.9% which is again, maybe due to the consistent high-volume of shorting. Despite it being recognized as the undisputed leader in pay-radio and consistent increase in revenue, are many investors short-selling the shares because they deem it overvalued?
For the Third Quarter of 2013, Sirius made substantial additions to its subscribers list; it now has more than 25 million of them. The company will most probably keep on adding more subscribers for the next three or five years because Sirius XM's satellite radio is now found in 70% of all new car releases.
Sirius XM is on track to deliver a $0.07 EPS for fiscal year 2013 and an estimated EPS of $0.12 next year. Sirius is raising its monthly fee by $0.50 this coming January, and this may help the company meet its estimated revenue of $4 billion next year.
Unfortunately, the shorts are probably thinking that a 47 Trailing P/E and 29 Forward P/E is not appropriate for Sirius XM, considering such a valuation is only justified for companies that have consistently produced 30% or 40% growth in earnings. Sirius has been criticized for its chronic low EPS for the past five years despite a steady increase in revenue.
On the other hand, despite the low EPS performance, Sirius XM is making money, while Pandora has still a negative EPS despite posting impressive gains in number of users. Pandora right now has more than 72 million active users. Pandora also did a significant 36% revenue growth to $144.3 million from its advertising business this Q3 of 2013.
It seems to me that the heavy and consistent short-selling of SIRI is unfair considering that Pandora will still need a few more years before it can even produce the net income level of Sirius XM.
SIRI Shares Fell Under Their 200-day Moving Average Line
The concerted short-selling could be a factor for the fact that SIRI shares recently went below its 200-day moving average for the first time since of 2012. Are the bulls of SIRI finally bowing out from the pressure and a bearish outlook is now starting?
SIRI's problem is also attributed to the imminent threat that free streaming radio services that Pandora and Spotify pose. Pandora has dramatically increased its number of users thanks to its ad-supported free streaming mobile music service. Spotify has also started to offer ad-supported free mobile streaming service which exacerbates the threat to Sirius XM.
Both Pandora and Spotify offer ad-free unlimited streaming premium accounts that are cheaper than Sirius XM's monthly fee. These two competitions already have almost 100 million active users together, and that number is rapidly growing. Add to these, the music streaming threat posed by Apple's (NASDAQ:AAPL) iTunes Radio, and the short-sellers of SIRI have plenty of fuel that keeps their fire going.
There's a persistent group of short-sellers of SIRI that makes the stock unable to advance. The shorts are winning, and SIRI may slide down over the next few months. Avoid buying SIRI now, and wait for the price to drop further. Let the shorts push it down, and if the price goes below $3, then a buy might be justified.
Sirius XM will most likely lose customers to free music streaming companies, but its acquisition of Agero Connected Vehicle Services may help it offset the revenue loss from Telematics services. There is a good opportunity for Sirius to monetize its huge presence in cars via infotainment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.