Why The Market Sold Sirius XM Short (And Why You Probably Should As Well)

Oct. 3.11 | About: Sirius XM (SIRI)

If you exist in a vacuum populated by nothing but the most bullish sentiment, I guess it's understandable why you would refer to the punishment Sirius XM (NASDAQ:SIRI) took last Thursday as "unexpected." That said, outside of what emotion can do to your perspective on a stock, I'm not sure where the confusion lays.

I noted that SIRI would see $1.50 before it would see $2.00 because I can read the writing on the wall. I outlined reasons to support that sentiment in countless Seeking Alpha articles on the stock after I exited my long positions at around $2.25. In fact, even while I was long, I was urging caution with respect to Sirius XM's long-term prospects.

From a technical standpoint, the chart, which collapsed long before last Thursday, has had (and still has) sell written all over it. I covered that angle in more than one article. And, if you look closely, even prior to Thursday's implosion, SIRI represents the Nasdaq 100's (NASDAQ:QQQ) dead weight. In fact, the stock's right there with the likes of Research In Motion (RIMM) and Netflix (NASDAQ:NFLX).

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SIRI performance versus RIMM, NFLX, QQQ before Thursday's sell-off
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SIRI performance versus RIMM, NFLX, QQQ, as of Friday's market close
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Charts courtesy of Yahoo Finance

Reasons other than technical, chart-related ones can help explain what is a very explainable plummet in Sirius XM's stock price. I have been writing about most of these for months.

First, no matter how you slice it, Sirius XM is a slow-growth company. The company's revenue growth comes closer to that which terrestrial radio experiences than to what high-flying competitors such as Apple (NASDAQ:AAPL) and Pandora (NYSE:P) experience. If we had the type of access to, say, Spotify's numbers, as we do Apple's and Pandora's I am sure we could say the same thing.

Again, the numbers absolutely do not lie. In fact, they're clear as day. As in, do not attach "confusion" or "unexpected" to the cold, hard facts:

Consider revenue. Sirius XM's quarterly revenue increased by just 6.4% between Q2 2010 and Q2 2011. Pandora's quarterly revenue jumped by 117.2% over the same period. Apple's total net sales rose 82% between its 2010 and 2011 Q2s. Between Q2 2010 and Q2 2011, Netflix (NFLX) saw its revenue pop by 51.7%. Even Research in Motion (RIMM), a company in the midst of nothing short of a collapse, reported a 16% increase in year-over-year revenue in its last earnings release.

The type of growth you see from Sirius XM is actually terrestrial radio growth. For example, Clear Channel's (CCMO.PK) radio division grew revenues by 4.3% between Q2 2010 and Q2 2011.

And even with guidance to the upside for FY 2012, the company's revenue still comes in short of consensus estimates. With all of the growth machines that investors can buy, it makes perfect sense why they would, over the last several months, decide to bail from Sirius XM.

While objective analyses show a chart in disarray since July and tepid revenue growth, the big question is why. Not why would the stock tumble - that much is too be expected - but why the slow growth that has, undoubtedly, played a role in SIRI's decline?

You cannot deny that Sirius XM does a formidable job of adding subscribers. That said, as other subscription services show, that growth must slow, if not stall or reverse. But I don't think that's where the pressure comes from, as the company, again, does a relatively good job of maintaining net adds.

The problem, instead, is that investors simply do not see any sources of explosive growth on the horizon for Sirius XM. And they're probably correct in their thinking.

First, the company does very little to leverage its existing mobile, online and retail platforms into meaningful streams of revenue. While Pandora sits on the verge of reporting record revenues as it becomes part of ad agency buys once exclusive to local broadcast radio, investors see the potential for massive growth. Gobbling up advertising via online and mobile platforms - where the opportunities have barely been tapped - piques the interest more than a business levered, almost solely, to the auto industry.

While I think they should, I'm not necessarily asking Sirius XM to advertise. That's not the point. The point, however, is that Sirius XM needs to get as aggressive in arenas that matter to investors - online and mobile - as Pandora is going after advertising dollars once automatically earmarked for terrestrial radio. I'm not sure why an investor would want to buy the stock of a company firmly entrenched in a slow-growth business over one that's barely scratched the surface of one of the most booming spaces of the 21st Century.

And Pandora's but one example. When investors look to Sirius XM's competitors, even Clear Channel, they see companies moving hard and fast to deliver their content through multiple platforms. When they look to Sirius XM, they have visions of terrestrial radio through the first decade of the 21st Century. We're here, we're in your car, all you have do is punch a button and, as a result, you come to us by default. In fact, all that keeps Sirius XM distinct from old-guard terrestrial radio is satellite delivery and a subscription fee.

Many SIRI longs and Sirius XM subscribers like to point to SatRad 2.0 and content as differentiators. Both points get repeated to the extent that some people actually believe they are meaningful. This might help explain why some investors call SIRI's recent free-fall "unexplainable."

SatRad 2.0 will roll out personalization way too late. Pandora's owned that space for a while. Clear Channel came out swinging at Pandora with the refreshed iHeart Radio. When Sirius XM finally gets around to rolling out its take on personalization, it will hardly make a sound. While it might be a nice value-add for existing subscribers, it will do little, if anything, to attract new ones.

Along similar lines, Sirius XM is staking a fair share of its future, particularly in relation to 2.0, on programming for the Latino audience. If terrestrial radio did anything right during the first 10 years of the new century, it did it by flipping countless stations - in markets big and small - to formats that cater to Hispanics. This is a market that terrestrial radio dominates, particularly in cities with large Hispanic populations. And they dominate with free, often local programming. I'm not certain why Sirius XM wants to use 2.0 to come in second fiddle on this count as well.

This also goes back to the company's neglect for online and mobile. It might be able to gain traction with Latino subscribers if it focused its efforts in those areas as opposed to the car and its current subscription scheme. Study after study shows that to target Latinos you should do it via new media platforms (i.e., social, online, mobile) because that's where they are. Instead, Sirius XM appears set to go after the scraps left behind by terrestrial radio by opting to go after Latinos, in their cars, via traditional delivery methods.

Simply put, Sirius XM, from a standpoint of innovation and being in tune with where massive revenue growth lays, operates much like terrestrial radio. In fact, I was shocked to hear from somebody who recently toured the company's world headquarters that most of Sirius XM's music stations employ voicetracking. This Wikipedia article does a nice job defining voicetracking - an invention of terrestrial - that Clear Channel has been hammered for using over the years. Again, this is very terrestrial radio of Sirius XM.

As some SIRI longs continue to search for answers to the "unexplainable," savvy investors will either stay away from the shares or find a strategy that suits them to ride it down to around a buck or less. The reasons were clear to support $1.50 before $2.00 and they've actually become clearer to support a move toward $1.00, barring some unforeseen series of events, such as M&A activity or, what I think the company should do - shake up management and bring in fresh, young blood from the Facebook's, Twitter's and Pandora's of the world. That could be a true game-changer.


Disclosure: I am long P.