Sirius XM (SIRI) has a lot of passionate investors, many of whom are looking to make a killing on the stock. Many of these investors look at Apple Computer (AAPL) and see that it was trading in the low teens a little more than a decade ago and now trades at more than $600 per share. If the share price of Apple could grow more than 50 times, why not Sirius XM? It seems as though some are hoping that simply placing the two ticker symbols in the same sentence will boost the share price of Sirius XM.
Here are two Apple comments from a recent article on Sirius XM:
I'm not sure I see $30-$40 a share [for Sirius XM], but it is possible and with Sirius bringing in new technology and even purchasing other companies that compliment their business it is very possible. Did anyone see Apple going to $600.00 a share years ago.
You [referencing the above comment] are right about apple and these augurs. Apple will see over a $1000.00 in a couple of years ... but apple train is out of the station for those who want to see their investments grow by fold.
I do see siri over $10 in the next 3 to 4 years. This is a phenomenal business with a lot of monopolistic aspects and unique appeal. We all know how monopolies prosper.
Is this optimism justified? Apple's rapid growth was driven by its entry into new businesses that began nearly 11 years ago with the introduction of the iPod. The company followed up 18 months later with the introduction of the iTunes Music Store, offering a catalog of more than 200,000 songs at $0.99 each. And, in 2007 the company introduced both the highly profitable iPhone and the iPod Touch, and more recently, the iPad. Each of these products drove growth well beyond the company's core PC business.
How is the growth of Sirius XM even remotely comparable? Sirius XM is a company that delivers audio entertainment for a fee. And most of the consumers that get to experience the entertainment during a free trial period choose not to pay that fee. It is a subscription model that is showing revenue growth, but it is a growth rate far slower than Apple.
As to Sirius XM being a monopoly, it isn't. Not only has the FCC ruled that the company is not a monopoly, but the company's 10k lists a large number of alternatives in the audio entertainment landscape:
We face significant competition for both listeners and advertisers. In addition to pre-recorded entertainment purchased or playing in cars, homes and using portable players, we compete with numerous other providers of radio or other audio services. Some of our new, digital competitors are making in-roads into automobiles, where we are currently the prominent alternative to traditional AM/FM radio. Our existing and emerging competition includes:
and the 10k goes on to list traditional AM/FM radio, HD radio, Internet radio, Internet-enabled smartphones, etc. And, Sirius XM does not exhibit characteristics often associated with monopolies:
A situation in which a single company or group owns all or nearly all of the market for a given type of product or service. By definition, monopoly is characterized by an absence of competition, which often results in high prices and inferior products.
Yes, Sirius XM has exclusive rights to broadcast certain content, including sports and on-air personalities, but exclusive rights last only as long as a contract, and contracts expire. Even with these exclusive rights, Sirius XM has had difficulty growing market share outside the automobile.
Do any of these factors make Sirius XM a poor investment? No, the company is continuing to grow and is now generating hundreds of millions of dollars per year in Free Cash Flow ("FCF").
Free Cash Flow
Sirius XM is expected to generate $700 million in FCF this year and that FCF can be expected to continue to grow. Currently the FCF translates to roughly $0.10 per diluted share. With shares trading at $2.12 at this time, that's a multiple of 21.2X FCF. Even if the FCF figure doubles over the next 4 years, it is still only $0.20 for each diluted share. And, even if investors are willing to continue to pay 21.2X the FCF per diluted share, that "only" gets to a price of $4.24/share.
There really aren't any other companies that have managed to grow like Apple. That doesn't mean they are poor investment choices. And Sirius XM is not a poor investment choice. Sirius XM should continue to have double digit revenue growth at least for 2012 and 2013 based on subscriber net additions and the growing impact of the price increase put in place at the beginning of this year.
It just isn't Apple and it just isn't likely that the share price will more than quadruple and go "over $10 in the next 3 to 4 years."
Disclosure: I am long SIRI. I have $3 January 2013 covered calls against most of my Sirius position, as well as some $2 and $2.50 January 2013 covered calls. I have made similar covered call trades to those discussed and may initiate (or close) a buy stock/sell option position in Sirius, at any time. I have no positions, or any plans to open positions in the next 72 hours, in any of the other companies mentioned in this article.