Therefore, those who are not thoroughly aware of the disadvantages in the use of arms cannot be thoroughly aware of the advantages in the use of arms.
--Sun Tsu, The Art of War
Pandora, the online radio sensation is probably experiencing late night boardroom meetings as well. Apple, a lead producer in the computer and consumer electronics industries led by CEO Steve Jobs, have been involved in negotiations with several record companies with the intent of improving iTunes customers’ access to music on multiple devices. The companies involved in the negotiations with Apple are Universal Music Group, Sony Music Entertainment (NYSE:SNE), Warner Music Group Corp. (NYSE:WMG) and EMI Group Ltd.
In order to provide a better picture of the competition Sirius is facing, let’s compare their respective attributes. Apple has a market cap of $331.6 billion while Sirius has a mere 7.11 billion not to mention that Apple has no debt compared to the SIRI debt to equity ratio of 34.56 and Sirius has already stated in the company’s annual report that:
“Our substantial indebtedness could adversely affect our operations and could limit our ability to react to changes in the economy or our industry.”
“Additionally, the Company’s strategy includes expanding its distribution network to effectively reach more customers and provide them with a high-quality sales and post-sales support experience. The Company is therefore uniquely positioned to offer superior and well-integrated digital lifestyle and productivity solutions."
The price of AAPL is currently about $360.00 as opposed to SIRI at about $1.81. Even though neither stock pays dividends at the time, it is obvious which holds more potential value from contrasting the two companies’ revenue growth: AAPL with an explosive 70.5% increase and the modest climb of SIRI at 8.83%. It is also worthwhile to note the difference between Apple’s retained earnings growth of 61.27% and that of Sirius at -0.42%. The disparity in the respective company’s price to earnings ratio speaks wonders of the different positions taken by these companies.
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To their credit, Sirius XM upper management saw this competition in the horizon and warned their stockholders in the Risk Factor section of their 10-K annual report that:
“We face substantial competition and that competition is likely to increase over time.”
Apple stated its position with an inverse attitude to that of Sirius in their own annual report,
“The Company’s business strategy leverages its unique ability to design and develop its own operating systems, hardware, application software, and services to provide its customers new products and solutions with superior ease-of-use, seamless integration, and innovative industrial design."
I believe that the price of SIRI stock may drop significantly if Apple follows through with its plans with the aforementioned various music industry giants and takes a generous slice of Sirius XM Radio’s pie of profit. This plan, if followed through with by Apple may not be the greatest achievement of Steve Jobs and his company, but it may deal a shattering blow to the already unstable appearing Sirius who suffered a $4.88 billion loss in 2008 and hasn’t come close to regaining that ground. The current PE based on EDGAR Online is over 160. That is pricing in a lot of growth for a company that may face a bigger and better Pandora radio, wider use of internet connected smart devices and a possible AAPL offering a "buy it once and own if for life" pricing model.
With Apple on the move to expand their service capabilities and Sirius struggling under the weight of debt, slow growth, and fierce competition, now is looking like the best possible time to be watching to see if SIRI starts to stumble.
“We may from time to time modify our business plan, and these changes could adversely affect us and our financial condition.”
Sirius has had a nice run but it looks like the company simply cannot handle the pressures of such a competitive market place where only the industry’s heavy hitters are likely to survive. Satellite radio was a great idea before wireless high speed internet became so widely available but like many pre-internet businesses this one may have the lights turned off or greatly dimmed.
I will be monitoring to see if AAPL enters the space which I expect it will. I will be looking to short SIRI call options as I believe it offers a lower risk profile than an outright short of SIRI stock.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in AAPL or SIRI over the next 72 hours.