Some companies have great stocks, others great products. As an investor it is often frustrating to do your homework on a company’s product, project the market’s value and correctly guess whether or not the company will survive to be an established industry player. Investors in Sirius XM (NASDAQ:SIRI) have had a tough go of it over the years, however there are some who believe that the company is at some sort of inflection point and the tomorrow that SIRI management has always alluded to is finally here.
SIRI’s cult-like following has grasped onto these talking points and really run with it. To this we are puzzled, because although the company is the last man standing due to a merger with its old rival (XM Satellite Radio), has cut costs as a result of the merger, and now has the ability to charge higher rates because the US government now believes it no longer has a monopoly on the industry, the industry has changed quickly and SIRI has not made the necessary changes.
There are a few things SIRI has going for it which include: Original content, exclusive broadcasting rights to various sports leagues, a large paying customer base and a super-sexy satellite fleet (which no one else has). On the surface, it’s a lot to get excited about, but take a second look and check under the hood and serious questions begin to arise.
According to Yahoo Finance, SIRI has a market cap of $7 billion. Revenue for the past year was $2.84 billion, with analysts expecting the current year revenue to come in just over $3 billion. Looking ahead to next year’s average analyst estimates and one sees top line growth to about $3.4 billion. So for the current year, revenue should grow a little over 6%, followed by 12% next year. Looking at the bottom line, next year’s earnings only increase by 14%, from $0.07 to $0.08 per share. One would expect higher growth in both the top and bottom lines, or even in comps, for a $7 billion company which trades at a 46 P/E multiple.
Just looking at Sirius one has to wonder about its exclusive contracts with sports leagues and its talent for original programming (think Howard Stern) and its added value. When Sirius and XM were competing the contracts made sense, and had a bit of a premium in them as there was competition bidding up the prices, however now all of those contracts are under one roof.
Obviously without another bidder the distribution rights will be lower going forward, but today it adds a high fixed cost to the business model. It does differentiate the product, but when you are maintaining that super-sexy satellite fleet which had a super sexy price tag, the economics begin to get skewed in my mind. Sirius 2.0 or not, it is hard to see how Sirius competes with the field.
Pandora (NYSE:P) does not get the respect it deserves from Sirius longs for reasons we do not understand. The company has a business model which makes sense, adds a twist to what consumers already understand, and provides a free service to those same consumers. Pandora is essentially Radio 2.0, using the tried and true model of radio stations by using ad revenue to offer a free service to listeners, yet with fewer advertisements and a music selection based on your music preferences, Pandora’s service blows away both terrestrial radio and Sirius’s due to its artificial intelligence.
Unlike Sirius, Pandora does not have to worry about keeping satellites in orbit or getting specialized devices in the hands and cars of consumers, but rather just get its application downloaded onto whatever device the consumer possesses that is capable of delivering SIRI's service. It is hard to take Sirius longs serious when they dismiss a company piggybacking on the devices of others to deliver a free service to consumers that otherwise might be tempted to try SIRI’s service. In our view, Pandora is SIRI’s most obvious direct competitor, aside from terrestrial radio of course, and essentially offers a comparable product at a superior price ($0.00/month!).
In the world of business there are those companies which do one thing well, and those which do many things pretty well. Apple (NASDAQ:AAPL) is the rare company that is able to do many things very well! Although maybe hard to understand at first how Apple competes with Sirius, simply take a look at the iTunes store. Today you can buy music, movies, novels, podcasts and many more items which makes them a competitor to SIRI as well as many others.
We have friends who purchased General Motors (NYSE:GM) vehicles and received the free year of Sirius XM radio. As soon as the year was up, each and every one of them began to download podcasts for their morning ride to work. These in many cases are radio shows which they subscribe to and get daily or weekly deliveries. How can SIRI compete with its radio offerings when today’s consumer might be less likely to shell out for the hardware extras the company offers rather than using what it already has?
The iPhone is the top selling smart phone, the iPod dominates the MP3 market, and it appears that the iPad is going to complete the tri-fecta for the company as it seems to have built an insurmountable lead in the tablet segment. All of these devices are capable of delivering high quality content to consumers and keep them from joining SIRI’s customer base.
In all of our years of investing we have found looking ahead has saved our investment more than once, and even allowed us to anticipate some tremendous trends in the market. Most people view Amazon (NASDAQ:AMZN) as a second ran in the digital download/sales industry trying to compete with Apple and all the others trying to deliver music to consumers on a subscription service or ad platform. Although today Amazon does not pose a threat worth losing sleep over each night, in the future Amazon might very well be dangerous.
The Kindle has capabilities which seem to indicate to us the possibility that people will not just be reading books off of them in the future. Our bet is that Amazon will use the cloud to store a consumer’s library, and use the WI-FI/data plan on the device to stream that to them (think Pandora on your iPhone). Today Amazon is not a direct competitor of Sirius XM, but the opportunity exists that tomorrow it could be a formidable competitor simply by weaving its various product lines into one cohesive offering.
Sirius XM no longer competes solely in its own industry and against the terrestrial radio stations as management seems to believe. That duopoly, and subsequent monopoly, are now finished. Today the lines have been blurred as competitors can simply launch a platform, for pennies on the dollar of what SIRI spent, via smart phones and other mobile devices which allows for increased competition. Increased competition has a tendency to shrink top-line, bottom-line and margins, all of which SIRI needs to keep growing in order to reward investors.
It is our long held belief that America’s capitalistic economy allows for both capital and ideas to flourish and be allocated accordingly. It is America after all which turned to the skies for an answer to a nationwide radio service, and America where that financing was raised to launch the satellites. Maybe it is now America’s innovation and capital allocation driving a dramatic change in how services are delivered to consumers. Like Iridium (the satellite phone service provider) before, Sirius’s investors while looking towards the skies for tremendous returns may have overlooked the formidable competition with a firm footing upon terrestrial lands.
We will leave the Sirius questions for others to muddle through, and stick with the rest of the field. Nimble competitors with excellent technology have a history of upsetting slow moving and debt laden monopolies. Any investor should like the odds of taking the field over SIRI when doing an analysis of the companies offering consumers services which can compete with its supposedly unassailable platform.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.