Why Sirius Offers Hype And Lacks Hope

| About: Sirius XM (SIRI)

SIRIUS XM Radio (NASDAQ:SIRI) offers SIRI common shareholders pure hype. SIRI common shares are void of hope based simply upon their balance sheet. Friends provide unsolicited advise that SIRI is "dirt cheap and the next 10-bagger".

The truth be known: I do want the next "10-bagger". Please don't misunderstand my goals. My conclusion, after a little SEC filing review, reveals SIRIUS XM Radio is not the next 10-bagger. Analyzing the SEC financial reports all point to the same conclusion.

Here is a table with Apple (NASDAQ:AAPL), SIRIUS XM Radio (SIRI), and Pandoro Media (NYSE:P) key financial metrics:

My Personal Satellite Radio Experience

I first learned of Satellite CD Radio, Inc. approximately 12-years ago. I have been an XM Radio subscriber for 10-years. I had the old XM devices installed in my car, and I gave XM devices as gifts. I had the cords running wild in my vehicle. The serviceman at Best Buy (NYSE:BBY) would use their tools to ensure all wires were hidden. I was the happiest guy with music and talk radio at my fingertips.

I was on speaking terms with "Ziggy", who was the satellite radio guru on selling XM and SIRI products. I knew the industry, the products, and the true geeks who thrive on the technology breakthroughs. It was true, I was on Cloud 9. These were my satellite radio glory days. Yet, I had not sensed the looming technological advances that were on the future's dance card.

Now I have SIRI, with the satellite service pre-installed, and I believe the price is "ok" but not a bargain. Technology has changed and SIRI has not kept up with the times.

Here are my primary SIRI user concerns:

  • The online service is a decade old in creativity and user friendliness. I would be embarrassed to say I created their online web services for customers. Hire a web designer and work on customer happiness.
  • Lack of innovation: satellite radio works primarily the same way for every device. SIRI is operating in a vacuum. Technology is changing. On every front, I have been bitterly disappointed with satellite-radio new product offerings.
  • SIRI's business model attempts to nickel-and-dime customers with new offerings. A barrage of "buy this" and "buy that" for only $2.99 extra per month is silly. Customers want more for their money, not less.
  • At one point, I had 4-XM products with subscriptions. Attempting to cancel a subscription was as easy as telling Richard Simmons that "I am not in the mood to exercise today".
  • The customer service staff were sales-driven and could care very little about making the customer's online experience easy, convenient, or headache-free.
  • SIRI appears to focus upon offering an unreasonable number of channels. My suggestion is focus upon the core channels that 95% of users want. Bring better content and focus less on niche markets. Quality over quantity usually is the better modus operandi.
  • Offer one price for your service. If discount pricing can be provided for everyone, then offer it. Figure out a pricing strategy where one is knows that received the best price available.

SIRIUS XM Radio Analysis

SIRIUS XM Radio has a balance sheet with $3-billion in debt. Liberty Media (LCAPA) owns 40% of SIRI. If anyone will win with SIRI, it will be Liberty Media and debt holders. The preferred shares, debt-laden balance sheet all will dilute the common SIRI shareholder.

Page 24, of SIRI’s 10Q, highlights year-over-year subscription revenue growth of 7%. This is not the work of a high-growth stock.

Make no mistake, CEO Mel Karmazin is a wonderful interviewee. He is, however, a showman and all hype. Liberty Media, for all intent and purposes, owns every move SIRI makes. Investors should explore, if they want SIRI as an investment, SIRI's debt instruments or preferred stock. The stock trades at $1.80 for a reason. Growth is lacking. Customer service is lacking. New technologies are approaching.

I make these comments based upon being a 10-year subscriber. The company’s financial statements are horrific. Common shareholders are at the bottom of any residual value after Liberty Media takes their ownership. Debt owners, preferred shareholders have first priority in the capital structure. The revenue growth equals the growth rate of a utility stock, or a tobacco stock. 7% revenue growth is inadequate to make this stock a 10-bagger for anyone involved via common stock ownership.

If the below 10-year earnings estimates prove accurate, then a $5.14-per share price may be in the wings 5-years out. That is a significant return on investment.

Pandora Media Analysis

In my experience, pandora is a great service. The business model doesn’t work, thus I don’t currently own the stock. The company pays extensive royalty and licensing fees. The company has zero debt on its balance sheet. I need to see better revenue generation ideas before I would consider purchasing Pandora Media stock. I use and will continue to use the service because of the company’s focus upon the end user:

I do have the premium offering which runs $36-per year. Here are a few benefits from the service:

  • The music is personalized to my demands.
  • I can create my own channels.
  • Smart phone users have downloaded the Pandora app in significant numbers.
  • Music Genome Project focuses upon creating a better, customized end user experience.

Unless Pandora can find an increased revenue stream, the long-term viability remains in question. I would sell P if I owned the stock. Revenue and earnings-per-share growth rates do not make this an attractive stock purchase.

Here are analysts 10-year estimates:

Apple Analysis

Apple is synonymous with the word "innovation". Apple has focused upon providing customers what they want at a fixed price. AAPL's products are considered the "coolest" and their customers are the most loyal of any company I know.

I could confidently cancel my SIRI subscription and use my iPhone 4 or iPod in my car. SIRI has lost touch with technology advancements and offers nothing AAPL can not provide me, albeit in another medium. AAPL's products, innovations, customer focus have created a debt-free company with terrific shareholder returns.

Apple’s iCloud will have significant benefits for the users. Time will tell how iCloud and iTunes will impact users’ listening preference in vehicles.

The below table shows a total annualized rate of return of 39.2% for the past 5-years. This compares to the SIRI return of -14.4% over the same time frame.

Apple, in my view, is the future. SIRI is debt-laden, 40% owned by Liberty Media, and without much hope.

Disclosure: I am long AAPL.