Sirius Satellite Radio: Expecting Extreme Profitability

Sirius Satellite Radio (SIRI) provides satellite radio services throughout the U.S. We have watched this stock with all of its associated hype since the addition of Howard Stern, sitting on the sidelines as SIRI's shares plummeted from $9 dollars to the current $3.50 level. Well, at the current valuation, we are no longer bystanders.

The bears view the current situation as unsustainable. Specifically, competing against free AM and FM alternatives is difficult and launching new satellites into orbit is extremely costly. Moreover, the duopoly of XM and SIRI results in very poor content contracts and extraordinarily high marketing budgets. That is, each company bids up major contracts, such as Howard Stern, Oprah, MLB, NBA, Martha Stewart, etc., and ends up overpaying, which makes earning a ROI nearly impossible. Each company also spends a lot of money on marketing due to fierce competition for subscribers.

Despite all the negatives, we believe that the satellite radio industry is viable and ultimately that SIRI will be extremely profitable. While it may be a tremendous tailwind to SIRI shares, we are not buyers simply due to the proposed merger with XM (although we do favor the deal passing). In short, we view current and historic SIRI losses as investments for the future. Satellite launches (with their related financing and D&A expenses), relationships with the auto manufacturers, and the rich marketing and content budgets (all the negatives discussed previously) are all investments for the future. At some point, SIRI will stem its losses and ride the return on its considerable investments.

(Anecdotally, we have historically viewed satellite service negatively, until recently purchasing a Ford vehicle with free SIRI service. We were impressed with the company's content, which provides further support in our thesis. Like Warren Buffet says, which he calls his "circle of competence," you should "buy what you know.")

While XM and SIRI may both be good investments, we view SIRI as a comparatively better investment due to its superior content and choice management team as well as its higher growth rates.

Disclosure: none

Comments

[bababooye]

The only thing keeping XM afloat is MLB and their relationship with GM. Based on some of the crap that GM is producing, it can only hurt this already sinking ship. Time to buy more SIRI!

[bababooye]

The only thing keeping XM afloat is MLB and their relationship with GM. Based on some of the crap that GM is producing, it can only hurt this already sinking ship. Time to buy more SIRI!

[Burns]

The Sirius-XM deal should go through, too much time and energy has been spent on it www.newsvisual.com/new... . If Sirius and XM want to increase sales, they need to enter into contracts with the more luxurious brands of autos and also with the airlines. People with money don't generally buy American cars anymore. Imagine having Sirius on a 15 hour flight, as opposed to the usually awful movies or radio stations that the airline provides. If Sirius can do this, they will make it.

[Hippocritical Ass]

You say, "In short, we view current and historic SIRI losses as investments for the future. "

This statement makes no sense. Over the last 2 yrs they have lost 2 billion dollars. At least half of this is directly traceable to the hiring of Howard Stern (if you don't believe it look at the losses analysts projected a month before Stern was hired). There is a billion dollar loss from Howard Stern that you want to call an investment for the future.

The problem is that Sterns contract is up in 3 years and SIRI gets killed no matter what happens. If Stern signs again, it is another 600 million (or more) over 5 years and he is not going to bring another 1.2 million listeners when he signs. If Stern doesn't sign, last week's Arbitron ratings make it clear that SIRI doesnt have much else to offer -- it is clear from those ratings that XM offers the more attractive content package other than Stern. Damned if you do, damned if you don't.

You say, "While XM and SIRI may both be good investments, we view SIRI as a comparatively better investment due to its superior content and choice management team as well as its higher growth rates."

What superior content is that. I refer you, once again, to the Arbitron ratings that came out this week. In these, only Stern, with a following of 1.2 Million (vs. his previous 20 million) defeats XM. See orbitcast www.orbitcast.com/arch...

XM has had its problems but SIRI's management still suffers from the overhang of the prior management. What, exactly, has SIRI's current management done that the previous management didn't do? Answer: Cut costs by cutting content quality. That's it. Is that the future of satellite radio?