Cowen Slams Goldman on Radio Stocks Analysis

Jun.22.08 | About: Sirius XM (SIRI)

In a note issued Friday, Cowen analyst Tom Watts was very pointed in his disagreement with Goldman’s Wienkes.

“We disagree with competitor’s negative view,” noted Watts. He also stated that investors could, “Expect a rebound.”

Yesterday, Outperform-rated Sirius (NASDAQ:SIRI) ($2.13) traded down 13% and XM (XMSR) 18% ($8.61). A competitor’s note (with which we disagree) contributed and technicals may have widened the arb spread. We expect FCC approval and the debt restructuring to drive a rebound of both stocks in the near term.

 

Watts cited several factors including: increased OEM installations (penetration rate) that would offset slowing car sales, substantial merger synergies of $5 billion, FCC approval in July, the debt issue being closed not as big a hurdle as some anticipate, and the arb spread to begin to narrow again as anticipated merger closure draws near.

While Watts did not take on specific aspects of the Goldman report, some obvious factors that I note are that Goldman states that “young people” are buying MP3’s. This is not real news. The “young people” have not been the largest contributor to SDARS subscriber-ship since the beginning. Additionally, the A-La-Carte pricing may make subscriber-ship something that is more budget friendly to the younger crowd. Combine MP3 capability with the “music discovery” allowed by satellite radio, and there could be a winning combination. The MP3 crowd is often music centered. A satellite radio service at $6.99 per month that enables fans to get only what they want may well carry more appeal.

Additionally, Goldman cited that ARPU would be impacted with the new pricing plans, and mentioned an OEM take rate of 50%. What it would appear Wienkes did not consider was that more attractive pricing points may increase subscriber-ship, thereby offsetting a lower ARPU (oversimplified example):

CURRENT TAKE RATE 50%

100,000 cars turn into 50,000 subscribers paying $12.95. 50,000*12.95 = 647,500 - ARPU of $12.95

TAKE RATE OF 50% Full Price, and 10% AT $6.99

100,000 cars turn into 50,000 @ $12.95 and 10,000 @ 6.99. 50,000*12.95 + 10,000*$6.99= $717,400 - ARPU of $11.96

While the ARPU is indeed almost $1 lower, the revenue coming in the door has increased. The ability to capture additional subscribers at the lower price point represents more dollars. ARPU is an average metric of revenue per subscriber. Simply stated, the business model will shift a bit more towards volume, something that it appears Goldman’s analyst has not fully considered.

With no company guidance and no real certainty, it becomes hard to know what analysis to count on. There simply is nothing for anyone to hang their hat on. Goldman is the “golden child” of the moment, but how long will that last? SDARS is quickly approaching a level where Wienkes will need to come out with yet another opinion. Will he “upgrade” from “convicted sell” to “sell”, or adjust his target further down? Only time will tell.

Position - Long Sirius , Long XM