Sirius XM Radio (NASDAQ:SIRI) is a fun company to discuss. Sirius is "fun" because reader engagement is full of life and active. Granted some comments have what would appear to be more thought put into them than others, but anyone discussing Sirius knows what goes into the meatloaf ahead of time.
I was asked a very good question in my last Sirius article and I started to reply when I realized the answer was way too long to put into a comment. I often will use Microsoft (NASDAQ:MSFT) Word with both comments and articles and those who also use it know the number of words is displayed on the bottom. Clearly when a comment word count starts to move over 500 words it is time to consider changing to an article or cutting back on the answer.
Here is the question at hand by StockNewb:
"I'm not an experienced investor, so don't flame me, I'm asking an honest question. If satellite delivery is an issue for SIRI, is it also an issue for Liberty Media ... or DISH ... or DirecTV ... or any telecom company? Everything can't move to wireless IP, and satellite reception, especially in rural areas, is supposed to be better."
I like this question because it gets at the heart of the matter with Sirius XM and satellite content delivery in general. Not unlike how fiber and microwave displaced copper to transporting content, Internet protocol (IP) will displace satellite signals with Sirius, DISH Network (NASDAQ:DISH) and DirecTV (DTV).
To be sure there are major differences between Sirius which is audio content compared to DISH Network and DirecTV which are both primarily video.
Sirius' largest strength comes from the fact that while driving down the road you are likely to pick up the satellite signal anywhere you go. Truck drivers love Sirius as well as morning drive time traffic that don't care to spend 30% of their drive time listening to ads and other "stuff." For now, wireless Internet is not built up enough to fully support pulling the plug on satellite radio. The problem Sirius faces is the wireless build out continues to grow, but also is accelerating. After the losses XM and Sirius experienced, causing a merger in hopes of survival, it appeared another competitor would not be found anytime in the foreseeable future. In fact, in approving the merger pricing limitations were put in place because of the monopoly fear (which is beyond dumb, but government employees want to demonstrate a need for their job I guess).
Smart phones like the iPhone by Apple (NASDAQ:AAPL), Google's (NASDAQ:GOOG) Android, Nokia (NYSE:NOK) with Microsoft's OS, and Research In Motion (RIMM) have fueled a massive demand for high speed wireless internet. At the same time along comes Pandora (NYSE:P), Clear Channel's (CCMO.PK) iHeart radio and a host of other offerings to allow smart phone delivery of radio (and video). Even YouTube should be included as music can be played without interaction between each song (regardless if you watch the video or not you can still listen). If your vehicle doesn't already have the capability to play Internet radio on its own, it doesn't take much to get your smart phone to play through your vehicle's stereo system.
I talked to Curt Beilke who operates some of the largest Ford dealerships in northern Wisconsin and consults other auto dealer management teams about the status of Internet radio in cars. He stated that all non-bottom end vehicles are coming with Bluetooth capability and Ford has "My Touch" along with a syncing process to allow smart phones to play through a vehicle audio system.
This is all brand new and the first cracks in the armor are hardly noticeable, albeit the writing is on the wall. Sirius has great content that is hard to beat for those who are willing to pay for it. The thought that others will not enter the space to compete with Sirius in my opinion is short sighted. In the meantime, expect Sirius to perform well, especially if vehicle sales pick up. With the average age of cars on the road at an all-time high, if we see a pickup in the economy we should also expect to see a pickup in subscriptions for Sirius.
Pandora is already blazing the trail as I have written about before, and even with the ups and downs of the day to day stock price, it's clear they are here to stay. One should expect more moves into subscription based services from them soon. Pandora already offers subscriptions and exclusive content type of subscriptions would appear to be a natural next step.
DISH and DirecTV probably have a bigger problem on their hands than Sirius. Unlike Sirius with a much higher barrier to entry due to wireless Internet limitations, the combination of high speed wireless and wired Internet has a much larger footprint. Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN), Apple, CBS (NYSE:CBS) with TV.com, HULU and others are clearly demonstrating the ability to stream content through the Internet. Using a smart phone and laptop truckers can watch movies and other TV shows while on the road at a stop. It should be noted that both DISH and DirecTV have increasing revenue year over year. How long this will last is a serious question that investors should be asking. If I owned either stock I would be looking to hedge my position with options. For example, with DTV trading near $48 per share, January $55 strike calls can be sold for about $1 each. If DTV closes above $55 on option expiration day in January it would be a gain of 17%. A respectable gain for about eight months.
I have relatives that live outside of Bloomer, Wisconsin. Bloomer has a population of 3,539 with the next biggest city over 25 miles away with a population of about 10,000. They don't even live inside Bloomer (about three miles outside the city) and they have farms surrounding their 18 acres of land. They may not lie in the wilderness, but they are in a rural area for sure. Even they have "high speed" Internet through DSL. They have Netflix and are able to watch moves through an Internet connection. At the same time I agree satellite TV makes sense and is the only option available to a lot of people and the revenue numbers support it. What we don't want to do is drive by using our rear view mirror and miss what's coming up in front of us. Amazon and Apple may be bigger future threats to DISH and DirecTV than cable TV.
The bottom line in my opinion is it may be true that "everything can't move to IP content delivery," but it really doesn't need to. If you're a shareholder buying Sirius for $2.17 a share you are not worried about ALL customers moving away, you're likely much more worried that enough will migrate away, causing a stall in earnings growth. You do not need to lose everyone for the stock to go down, just ask investors of Netflix what can happen when just simple growth becomes difficult.
Sirius covered calls over the last year or what I suggested back about March last year, selling call options would have been profitable. Considering Sirius trades near of what I consider expensive (currently a PE of 19.68) with growth priced in, with rich option premium, it makes sense to me to hedge. With a market cap of over $8 billion, Sirius would have to become a $16 billion dollar company for the stock to double. At the same time it can be expected others will come along like Pandora and iHeart radio that can deliver the content with ever decreasing cost. It doesn't mean Sirius is a bad investment, but it does mean it may not be realistic to expect a double or more from here. If you can't expect to at least double your investment with a $2 stock it may be time to look for other solutions.
Selling a December $2.50 call for $0.18 from a $2.17 stock makes a gain of about 25% in for Sirius holders in eight months' time. If Sirius stagnates and doesn't move you still make almost 10%.