I just finished reading Cameron Kaine's daily article on SiriusXM (SIRI) titled Sirius XM And The Challenges It Faces In 3 Years. The article stresses the dependency of the company's business model on the sale of new cars and how it faces "saturation." I agreed with much of what Cameron wrote, up until the last sentence of the article "And for this reason, it remains a good short."
I have many concerns about the challenges facing Sirius:
- If Liberty Media (LMCA) increases their ownership percentage to more than 50% later this year, what impact will that have on the near or long term price of the shares?
- What will Sirius do with its stockpile of cash, a pile that should continue building up over the next few years?
- When will we see an OEM announce that they are installing 2.0 in the dashboard?
- Will the company increase guidance as many expect, and because it is expected, will it be enough to satisfy the market?
- Is the used car program gaining traction?
- Is the price increase impacting conversions and churn?
- How much good and bad news is priced into the shares of the stock?
It is interesting how two investors - one short and one long - can look at the same data, problems and opportunities and draw very different conclusions. Cameron sees the dependency on auto sales as a negative, and to an extent, it is. And it doesn't matter whether it is new cars or used cars. He refers to market saturation, and makes a comparison to the cable television market. He facetiously asks:
I'm trying to wonder if my previous investment in Time Warner Cable (TWC) has ever caused me to do due diligence in the real estate market? Remarkably even with the foreclosure concerns and the bursting of the housing bubble, neither cable or satellite television companies such as DirecTV (DTV) felt any significant impact.
I don't know how much impact is significant, but last summer Bloomberg had an article titled Pay Television Faces 'Toxic Mix' as Subscribers Cancel in Record Numbers that noted:
The six largest publicly traded U.S. cable and satellite-TV providers combined to lose about 580,000 customers in the second quarter, the biggest such decline in history, according to company and Bloomberg data.
Maybe paying attention to the real estate market isn't critical, but tracking new household formations would seem important. Headlines about "boomerang children" have been appearing for a while as college graduates return to live with their "empty nester" parents because they are unable to afford apartments or find jobs. Tightened credit standards and the tight job market have an impact as well, with some couples delaying marriage plans and slowing household formations.
Should new vehicle sales data be important to Sirius investors? Absolutely. Is the market saturated? I don't think so, at least not yet. In May, I wrote an article discussing how the losses from churn and termination of paid promotional subscribers would lead to subscriber equilibrium - new subscribers from the OEM channel would equal the losses. As the growth in subscribers slows, the P/E multiple should contract. What will that mean for the share price?
This is probably one of the focal points of disagreement. The "E" in the P/E ratio should continue to grow. Ignore the issue of share buybacks for the moment. Sirius has a lot of debt and pays a lot in interest - about $300 million per year. Paying down debt, or even refinancing it as it comes due, will grow "E." Sirius instituted a price increase January 1st. The positive impact will be gradual as it will be implemented when subscriptions renew and both revenue and "E" will show improvement. Advertising revenue and profits continue to grow, from a small base, but it is growth.
Other opportunities are out there, but no data has been shared by the company. What is happening with the used car program? Smartphones? Internet subscriptions? Not very much, it would seem. If these were showing traction, the company should be letting investors know. These represent challenges and opportunities.
When Sirius CEO Mel Karmazin spoke at the Liberty Media Corporation 2011 Investor and Analyst Meeting, he floated the idea of an advertising supported model to take advantage of all the deactivated satellite radios. He noted that there would be tens of millions of inactive radios in a few years. Offering a limited line-up of about ten stations, supported by advertising, could bring in additional revenue at minimal cost. It could also prove to be a disaster if they lose a significant number of self-pay subscribers.
Many of these are longer term opportunities. Cameron's article title calls out a three year time period. There is certainly time to address these issues. Do they make Sirius a candidate for a short? I honestly don't know. This is a stock with a lot of volatility. I am sure traders can make money on both sides of the trade. They can also lose money on both sides of the trade.
While I agree with Cameron that Sirius faces challenges, the company also has opportunities. Those challenges do not seem to be sufficient to make Sirius "a good short." He may make money on his short position, but it is more likely to be based on the volatility of the stock rather than for the reasons stated. Longer term, I believe the shares will grow in value, and, I certainly think that three years from now the stock will be higher than it is today. That is why I am long.