What Is Wrong With Sirius XM

| About: Sirius XM (SIRI)

Sirius XM (NASDAQ:SIRI) shorts have been on a winning streak lately as the stock has lost 15% over the past week and leaving Sirius longs to ask what is wrong with Sirius XM?

This is the question Sirius investors are asking these days as the stock has closed down for four consecutive days and appears to be heading that way as of this writing. Sirius' shares on has hit an intra-day low of $2.05 as of this writing (1:49pm on 6/8); its lowest level since hitting $2.07 intraday on May 17th. After hitting an intra-day high of $2.44 on May 31st, Sirius' stock closed down for the day at $2.35 on almost 292 million shares. We soon learned that the reason for the increase surge in volume was due to the rebalancing of the MSCI Global Indices as reported by Satwaves Pro.

Sirius continues to be an anomaly; the stock, in stubborn fashion simply refuses to do what one expects it to. It is truly remarkable and in that regard I don't know of any other stock to compare it to. It has become a love-hate relationship for most investors. I wrote a couple of weeks ago how I no longer thought Sirius' stock was expensive; this was when it traded a $2.33. As I have been prone to do, I followed my own advice and re-established a long position at $2.30 last week on to watch it plummet to $2.17 two days later.

Sirius often has the uncanny ability of making one appear brilliant, but in similar fashion, just when you realize you are beginning to understand this stock, you are left looking in the mirror and questioning if you have any ounce of intelligence left. This was how I felt at $2.17, what do you suppose was my self esteem as I watched it drop to $2.07? Sirius mind games are nothing new, this is what the stock does and has been doing for quite some time. To be successful, you can't get too high or too low, but the natural thing for me to do was to average down. I added another 3rd to my position to lower my cost basis; it was the only logical thing to do if I truly felt it was valuable enough to buy at $2.30.

Why has the stock been dropping?

It is clear that a trading range has now been established; which makes me now more comfortable to take a modest "long" position in the stock even though uncertainty remains. If it shocks you that I have "long" in quotes it's because I won't hesitate to take a profit and go in the other direction if valuations dictates. I think it is safe to now say that the stock has sufficiently consolidated from the exuberance that triggered its recent highs post earnings.

Rick Aristotle Munarriz of The Motley Fool offered another possible reason for the decline of the stock. Frankly it is one that I think makes a very compelling argument. Rick pointed out that Pandora Media (NYSE:P) is inching closer to its IPO and reminded readers that Pandora updated its anticipated offering last Thursday, aiming to sell 13.7 million shares -- though underwriters can bump that up to 15.7 million. The initial pricing range per share is now $7 to $9. This amounts to as little as $96 million to as much as $142 million being raised in the deal.

Rick continued by pointing out very astutely that less than a tenth of the company's stock is being sold in the IPO. There will be a total of nearly 160.8 million shares outstanding if the overallotment is exercised, implying a value of $1.45 billion at the $9 price point. Tack on the real possibility that the deal prices higher -- and the even greater likelihood that the shares will pop higher out of the gate -- and Pandora's valuation now becomes a matter of billions.

The question Rick asked was will Pandora's trading debut help or hurt Sirius' stock? While I think it is too early to tell, it is not one that investors should overlook. We have seen evidence where one mistakes the popularity of a stock for superiority in the product or service. This is an issue will ultimately be settled by the managerial execution of the respective companies. The other question is, who should you have your money on? How will it look if Pandora starts trading at $10 and Sirius is at $2.20? Some arguments will be tough to both sustain and justify at that point. But one thing is for certain, there will be arguments.

Another possible catalyst to Sirius' recent decline arrived last week. The Bedford Report released its summary on the Radio Broadcasting Industry and suggested that both satellite and conventional radio broadcasters are facing headwinds this spring due greater competition in the car market, and the possibility of an NFL lockout. In addition, new car sales have shown signs of slowing in recent months, limiting the expansion of satellite radio. The report examined the outlook for companies in the Radio Broadcasting Industry and provides investment research on Sirius XM Radio. What it found were concerns that many Sirius investors have shared for quite some time; Sirius' overly dependency on the auto market.

Autodata Corporation recently reported that 1.1 million vehicles were sold last month, 3.7% less than a year earlier and 8.3% less than in April. Rising car prices, a gas price spike and inventory shortages combined to slow auto sales, said Jeff Schuster, an analyst at J.D. Power & Associates.

We all know that as auto sales go so does Sirius. The company continues to rely on rebounding car sales (or a growing SAAR) to boost subscriber growth. Sirius added 373,064 new subscribers during the first quarter, ending the period with a new high of 20.6 million customers. That data was well received, but I approached it with caution for this very reason; 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.


Sirius still has some fundamental areas on which to improve before I can be long the stock and still sleep well at night. For now, since I feel the stock is at the very least "fairly valued" I feel it is worth the risk of some sleepless nights. Considering that the stock has recently reached a high of $2.44, from this current level (below $2.20), there is clearly an advantage for value investors looking to get in on a quick upside play.

Disclosure: I am long SIRI.