The economic principle known as "demand" describes a consumer's desire and willingness to pay a price for a specific good or service. Holding all other factors constant, the price of a product or service increases as its demand increases, and it is that which is driven by technological innovation and by growth in business activity and consumer spending. However, the level of demand for the particular product or service has a lot to do with macro-economic factors such as others within the target market -- better known as "the competition." In this article, I attempt to address some popular areas of concern as it relates to Sirius XM (NASDAQ:SIRI).
For several years now may have been touting not only the growing number of competitors for Sirius, but also that the company is unable to make money. This is still being said as they watch the stock appreciate by 1000%. One of the first things that are is unanimously mentioned by Sirius' opposition is the subscription price. That is to say, why pay for a Sirius subscription when you can get (fill-in –the-blank) for free? I say (fill-in –the-blank) in lieu of one particular company because it seems each day a new one emerges that is proclaimed to be the "death knell" to Sirius.
The fact of the matter is Sirius offers a tremendous array of diverse audio content at a modest cost. What else is available to the American consumer that provides a comparable level of daily satisfaction at a cost of less than $0.50 a day? As evident by the growing number of subscribers over the past two years, there is clearly a demand for Sirius' service. While pundits may choose to scoff at various known improving metrics in an effort to poke holes at the business model, what they are unable to dispute that the model IS working. This has left many analyst and pundits scratching their heads and forced to admit that Sirius XM is in fact a growth company.
When discussing excitement, you will be hard-pressed to find any stock with a more passionate fan-base than the investors of Sirius. With such passion and cultish following comes volatility; in both the investor and the stock. The volatility comes as the result of a bitter fight between the bears and bulls; in which both camps feel they are right. I did mention that Sirius stock has appreciated by 1000% over the past two years, so with that, it is hard to dispute who's winning the fight.
Since the start of its recovery, Sirius has reminded me of a movie studio that specializes in thrillers, dramas, comedy's and from time to time even a romantic comedy when I think about its courtship of Howard Stern. But regardless of your preference in genre, one thing that Sirius will do is stir your emotions as evident by the up and down swings of its stock. Not only has it tripled over the past year and a half, but it is currently up almost 20% in the first four months of this year. The question that the bears are asking is "It can't continue to climb, can it?"
Well if we study Sirius' short interest position over the past 52 weeks, we can see that this question has been asked before and has been answered over and over again at each critical mark when met with resistance.
So is it worth the fight?
The concern that most bears have is that the company is over-valued and even suggesting that it is only worth a 1/3 of the price. The lack of respect is hard to rationalize considering the drastic fundamental improvements undertaken by its management, particularly when focusing upon balance sheet and growth projections.
2.0 with $2 increase in rates equals $2 stock price
Just as the tough climb to $1 a year ago during and after SIRI's Nasdaq compliance run, it seems there is equal resistance to get to $2. But I suspect that soon will change with a "catalyst or two." There has been much speculation about the company's ability and willingness to raise its rates from the standard $12.95 to possibly $14.95 or even $15.95. Regardless, this is something that it MUST do to remain competitive and viable in the model. My guess will be that the increase will be gradual and we should expect the company to adjust its rates to $14.95 sometime this summer.
Let's discuss Sirius 2.0. Last September Sirius' CEO, Mel Karmazin offered this:
"Our next generation of satellite radios is expected to offer significantly more choices for the consumer and contain functionality that does not exist today in our radios."
This is arguably the most significant catalyst towards a $2 share price because we have since come to realize that according to a Sirius owned patent filed in 2008, it reveals some interesting possibilities. The Patent Application #20090320075 details the following:
"The present invention relates to a system and method for providing a broadcast radio service listener with the ability to generate a personalized radio channel play-list on a radio receiver from broadcast content as it is received. More specifically, the present invention relates to a system and method for buffering content from a set of channels selected from among the broadcast channels of a source stream(s) as they are received, and for generating a playback stream using the buffered content that provides a multichannel listening experience to the user with preview, reverse, fast forward and other navigation functions for the buffered content."
So clearly, we can see that this is the progression of radio as mentioned in a previous article and a true major catalyst towards the critical $2 threshold. Where some are placing Sirius' long term viability on the notion that it needs to acquire Pandora or one of its competitors, it is clear that Sirius has the capability to develop a Pandora-like interface with its own audio intelligence.
As the bears continue to circle around Sirius’ supposed lack of future, there are many bulls that have chosen to assess its potential from what it has already accomplished. I mean, why not? How plausible is bankruptcy now if it didn’t occur when the economy was on its ankles nor before its Liberty partnership?
The Bull Case
Recently, Gabelli & Company analyst Brett Harriss upgraded Sirius from a HOLD to a BUY rating. This news sent the stock surging upward from a recent low of $1.62 to an intraday high of $1.86. Also, rather than put a 12 month price target on the stock, Harriss sees the stock trading on future growth and points to a 2015 PMV (Private Market Value) of $3.25. Harriss sees Sirius XM having pent-up pricing power and believes that the company could initiate stock buybacks in the second-half of 2012, subsequently returning ~$6 billion in capital or 55% of the company’s ~$10.9 billion market capitalization by 2015.
Interestingly Harriss noted, while he sees the "competitive landscape changing," with Internet radio service providers such as Slacker and Pandora providing commercial free music to smartphones, Harriss doesn’t view these competing services offering "the news, talk and sports content required to offer a comprehensive radio product." Who can disagree with that since Sirius has exclusive rights to its content?
So where one analyst wishes to point to competition as being a major concern, another sees that competition as an opportunity. But like everything else, it all depends on whose opinion you value and whose you chose to believe. There are over 200 million cars on the road today and new cars sales will are approaching 16 million sold each year. You look at those statistics alone and you will not only see a huge opportunity but also demand. Competition or not, Sirius will have a say in the audio entertainment space.
A $2 increase in the basic subscription rate is all but assured and I don't expect any adverse reaction by consumers in a growing economy. Sirius will introduce 2.0 to not only revolutionize the automotive audio entertainment market, but also to be a "game-changer" in the Internet radio space. With both of those realities in place, investors will be rewarded with a stock price well above $2 by the end of the year. It will be a Sirius two-step that we all can dance to.
Disclosure: I am long SIRI.