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I love the Miami Dolphins, I’ve always have. In fact I think I was a Dolphins fan before I was even conceived. I remember growing up in Miami and listening to 560 WQAM, a local all-sports radio station that broadcast Dolphins’ games. During the NFL season, every Sunday – depending on whether the Dolphins won or lost, would determine the type of callers that would call to talk about the game. These fans are known in sports as “Monday morning quarterbacks”. Basically, with the advantage of hindsight, these callers appeared more brilliant than the coaching staff and the players in bringing to light what could have been done differently to alter the outcome of the game.

“The entire coaching staff needs to be fired”. “The quarterback is a bum” – Two of the most popular opinions often presented to the talk show host as being the immediate solution to a winning team. As much as I often wonder how impulsive and irrational these callers were, when I became an investor, I developed an appreciation for such passion and criticism. Because in my opinion, investors or "stock fans" should be neither passive nor mere casual observers of their investments.

My most recently article about Sirius XM (SIRI) generated some hate mail this week. It seems I rubbed some investors the wrong way when I said:

Valuations and fundamental metrics are things that are often considered “unimportant” by investors of stocks that have reached cult status. As Sirius’ fundamentals continue to improve, so will its stock price. However, as Sirius maintains its cult status with fans who chose to disregard fundamentals, Sirius will be a prime target for shorts.

I didn’t realize that admitting that SIRI was a cult stock would have generated such controversy. In fact, I took it for granted that it was widely known. In the comments section on the article, I had to offer the following explanation to a reader who was clearly offended by the quote above.

I didn't mean "cult" in a negative sense. It is just like loving the Miami Dolphins. You have heard of Raider Nation, The Cheese Heads, Terrible Towel, and Yankee Nation etc. etc. These are referring to fans or fanatics of a particular team. In this case, it's a product or brand. I'm also a part of the Sirius cult and proudly so. So please don't take it in an offensive way. That was not my intent.

In this article I attempt to point out if readers are stock fans or investors. I will try to do this by combining both passion and fundamentals in a way to merge them to show that both terms are not mutually exclusive. The joy of being a passionate fan can also work while still realizing the importance of the metrics that drive your investments. Because I think long Sirius XM investors need to remove the stigma that is attached to anyone who seeks to understand the company better by pointing out deficient areas of the company.

It seems that it has also become neccessary to point out the scarlet letter that is often attached to anyone who dares to criticize the company. I have become astonished to discover that anyone who mentions Sirius’ “conversion rate” or “churn” is immediately labeled as a “basher” or a “short”. Think about it, if a Dolphins fan calls the radio show to complain about why the team didn’t draft a running back, does that make the person less of a fan? Of course not. He saw an area of improvement on the team that was not addressed. In fact, one can argue that it makes him more of a fan than the person wearing the #13 jersey that didn’t even realize that the draft had taken place. I think it is time that the Sirius investor community remove the stigma that comes by way of any form of criticism towards the company.

Sirius – Behind the Metrics

In a recent article I talked about Sirius’ Q1 numbers. I mentioned that the street saw the bullets below and rewarded the stock handsomely; to the degree where it reached $2.42.

  • Subscriber growth accelerates. Strong auto sales drove net subscriber additions in the first quarter of 2011 to 373,064, up 118% from 171,441 in the first quarter of 2010. Ending subscribers as of March 31, 2011 were 20,564,028, up 9% from the 18,944,199 subscribers reported as of March 31, 2010.

  • SAC improves. Subscriber acquisition cost (SAC) per gross subscriber addition was $57 in the first quarter of 2011, a 3% improvement from the $59 reported in the first quarter of 2010.

  • Churn stable. Average self-pay monthly customer churn was 2.0% in the first quarter 2011, in-line with the first quarter 2010 monthly average of 2.0%.

In the article, I asked the question, “what was in the Q1 numbers that justified an increase of almost 2 billion dollars in market cap?” Nobody could give me an answer. The reason is, there wasn’t any logical answer to give. I read comments from readers about Mel Karmazin’s projections which were all valid, but not nearly enough to warrant such a premium in less than a week. Since then, the stock has seen a decline, but in my opinion, it still remains pretty expensive.

FIRST QUARTER 2011 RESULTS

Subscriber Data.

The following table contains actual subscriber data for the three months ended March 31, 2011 and 2010, respectively:

Unaudited

For the Three Months Ended March 31,

2011

2010

Beginning subscribers

20,190,964

18,772,758

Gross subscriber additions

2,052,367

1,720,848

Deactivated subscribers

(1,679,303)

(1,549,407)

Net additions

373,064

171,441

Ending subscribers

20,564,028

18,944,199

Self-pay

16,807,643

15,773,671

Paid promotional

3,756,385

3,170,528

Ending subscribers

20,564,028

18,944,199

Self-pay

120,844

69,739

Paid promotional

252,220

101,702

Net additions

373,064

171,441

Daily weighted average number of subscribers

20,233,144

18,783,263

Average self-pay monthly churn (1)

2.0%

2.0%

Conversion rate (2)

44.7%

45.2%

While headlines can sometimes present an idea of what is in the content, it is not the way investors should get information about how their company is performing. The due diligence process involves more than reading headlines. When I announced that I was short SIRI’s valuation, some readers mentioned that they “didn’t have the courage to do it” or they were “afraid that the stock might take off”. I think that speaks to how strong information is. Without it, there is often fear of the unknown. Warren Buffett summed it up best when he simply said “fear comes from investors not knowing what they are doing”.

The headlines from the press release read precisely as the bullets provided above; by highlighting the 373K net additions as well as SAC and the 2% churn rate. However, if you look at the highlighted part of the table above, it tells a different story. While 373K net subscribers in Q1 for the period of January through March looked impressive, during that same period, Sirius lost 1.6 million subscribers through deactivations. You can do the math and see that at this rate, the company is projected to have 6.4 million subscribers deactivate this year. The conversion rate registered at 44.7%, while many would proclaim that to be a “decent” number for this model, it is worth noting that the number is down from the previous period of 45.2% last year.

I have said this before many times, the 373K net subscriber additions for Q1 was highly attributable to a robust SAAR quarter. As Sirius continues to languish on the retail side, it is increasingly important for auto sales to remain on its uptrend in order to sustain its growth. Additionally, from an operational perspective, astute investors will be able to look at the chart above and notice that while the self paying subscribers grew by 6.5%, the number of subscribers that deactivated for the quarter grew by 8.38% year over year. While Sirius XM fans may want to dismiss these number and make excuses, Sirius XM investors should be interested in learning what the company plans to do to reverse this.

What are you, a fan or an investor?

There is nothing wrong with being either one, and I think it is possible to be both like I am. Hootie and the Blowfish had a song titled “I only want to be with you”. In that song, there’s a part that says, “you wonder why I'm such a baby, cause the Dolphins make me cry”. Well, don’t laugh, but it has happened, ladies and gentleman. During the NFL season, my wife is on pins and needles hoping that the Dolphins win because the mood of our house for the entire week often hinges on a either a touchdown pass or a late fourth quarter interception. As sad as that may appear, it speaks to my love for the team. If we lost, I would be on the radio station calling in the next day complaining about the play calling.

It is no different for Sirius XM. Investors can be both a fan of the company and a fan of the stock. But investors should also be able to look at what the company is doing poorly and discuss ways they can improve. That does not make one a “basher”. In fact, I am of the opinion that those that are highly critical of the company have more to offer the investment community than those that say this stock is going to be $100 in five years. Really? I then point to the conversion rate and the 1.6 million subscribers who deactivated during the quarter and just shake my head. After seeing the Q1 results, investors need to contact Sirius investor relations as “Monday morning quarterbacks” and ask why the company did not “draft a marketing team" in the first round.


Disclosure: I am short SIRI.
Source: Why Sirius XM Fans Should Become More Serious Investors