I'm probably dating myself with this one, but years ago Pepsi (PEP) set up shop in malls across America and performed the most famous blind taste test in history. Two cups of soda were poured with placards placed face down to identify each---one Coke (KO), one Pepsi. A media campaign then centered around all the people whom blindly chose Pepsi over Coke.
It is in this spirit that I offer the following challenge regarding Sirius XM (SIRI) and another subscription based entertainment business that would fall under the category of a consumer discretionary product. Take a look at the chart below. There are four columns. The first two columns represent one company, while the second two columns represent another. Which company would you rather own stock in?
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The company on the left is Netflix (NFLX), and the company on the right is Sirius XM Radio. As you can see the two are pretty evenly matched, although if you are like me you would have chosen Sirius XM based on the side-by-side comparison. I did have the advantage however of knowing which was which, and I also know that Sirius XM has $8 billion in NOL's to use as a write off against future profits. I also know that Netflix ARPU is expected to decline going forward, along with its growth, based on a report from Credit Suisse. The Sirius XM estimates are courtesy of Murray Arenson of BGB Securities.
Lately, we've heard a lot of criticism from the analyst community regarding Sirius XM's valuation. It has been pointed out that Sirius XM is trading at nearly 17X next year's EV/EBITDA. Netflix on the other hand is trading at 28X EV/EBITDA currently or 19X next year's EV/EBITDA. Both have been downgraded by the analyst community based on these levels.
A year to date comparison of the two demonstrates that both have performed well this year. If however Netflix shares can ignore valuation concerns, why then would the same not hold true for Sirius XM? Netflix must compete with broadcast television, HULU and other internet offerings and RedBox just as Sirius XM must compete with terrestrial radio, internet alternatives and the iPod.
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What can we take from all this? The job of determining a fair value for a stock is and always will be determined by the people that choose to invest in any particular stock...not analysts. History tells us that investors will ignore valuations, and prices are determined by what an investor is willing to pay to own common stock.
There was a time that Microsoft (MSFT), Apple (AAPL), Google (GOOG), Intel (INTC) and many others were considered overvalued, and huge gains were missed, as those that missed the boat shook their heads in disbelief. Both Netflix and Sirius XM have quality businesses in which fundamental estimates are consistently proving to be too conservative to base such valuations on.
Disclosure: Long SIRI