Goldman's Sirius Call: Solid Thesis, Poor Timing 66 comments
Mike Stathis
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I just wanted to make something clear with all this talk about satellite radio. I'll be blunt. It's going nowhere. That is why I haven't followed Sirius (SIRI) or XM (XMSR) for several years. Why waste my time when I know how the game will turn out?
Let me explain. After releasing a research analysis on the sector in my newsletter in 2004-2005, I have not bothered to follow the satellite radio stocks because I already knew their longer-term fate. It's the same action I have taken on other companies that I predicted would go bankrupt or be sold on the cheap. And I have been right about all of them. It's not that I have a crystal ball or that I'm amazingly clever; it's just a matter of using some common sense combined with an understanding of business dynamics and competitive forces. I will summarize the main points of the 2004-2005 analysis I made on Sirius and the future of satellite radio:
Sirius will not make it. It will either go under or be sold on the auction block. Why? The industry has poor business dynamics as a standalone. It has high churn, short retention, and high customer acquisition costs. Only a diversified company can remain in this business. The wireless providers realized the need to secure a certain level of guaranteed revenues and they came up with contracts. The satellite radio business has not structured any value into their business that would allow them to drive revenues on a contractual basis. As a result, revenues are highly uncertain and will remain volatile, while net revenues per subscriber have little room for growth due to the high churn.The enormous debt seen in Sirius and XM is just one indication of the poor business fundamentals of this quasi-sector. Just look at the profit and operating margins. These guys won't be able to turn a profit until they surpass 20 million subscribers. And that simply is not going to happen for a very long time if ever. As it stands today, Sirius is in much deeper trouble than XM. The company self-destructed by giving away most of its equity to its CEO and Howard Stern, as if the stock had little value.
It turns out that it didn't have much value. Even Stern apparently realized this and sold his stock.
While XM is fundamentally stronger and will emerge the winner, this won't last long. The big guys in media will force XM out when Internet is installed in autos which is coming in a few years. Yahoo (YHOO), Microsoft (MSFT) and others will offer free Internet radio as a way to seize the market. Then they will offer a paid service similar to satellite. This will steal away the customer base of the satellite providers. In the meantime, earnings from their other business lines will enable them to endure difficult transitional periods. If needed, the big media players will create a price war which Sirius and XM will not survive.The only one's who will profit from Sirius are the CEO and Stern.
Things are playing out just as I predicted. Soon you will see how even the XM-Sirius combined entity gets destroyed when Internet radio enters the scene. The only thing that has changed in the four years since my report is that Yahoo has weakened and may not go forward with an Internet radio platform, at least for a while. But you can bet others will. If you do not understand the media war that has been going on now for several years, you really need to get up to speed. The big players in this war are Microsoft, Sony (SNE), Yahoo, some of the telecom and cable providers. The XM-Sirius entity will ultimately have to go up against these guys and they aren't going to win.
Now, will the combined XM-Sirius entity appreciate in price from here? I wouldn't doubt it. After all, many companies on a downward trend make short-term bounces. But that might only provide an exit for existing shareholders, as the odds of satellite radio surviving long-term are very slim. Internet radio is the future. And the only way satellite will play into the picture is through satellite-Internet radio, which will be a free service, with an optional paid service for no commercials. Once the paid service of XM-Sirius is knocked out, only then will the paid service model be a growing entity. And the only role XM-Sirius will play in this might be after being bought on the cheap by one of the big players.
You can bet Sirius is desperate for this merger to go through because they realize they're on their last leg. It's similar to the situation with Blockbuster (BBI) practically bending over backwards to merge with Circuit City (CC). Unlike XM, Circuit City has something to offer-a real business with a long history of profits and no debt (only seasonal borrowing or inventories). You can probably tell how I feel about any possible Circuit City-Blockbuster deal. But that's another story.
Only time will tell if I was completely right in my analysis. But one thing is for certain: those who read my report 4 years ago (quoted above) had a chance to bail out of XM and Sirius at $25 and $7 respectively.
Sirius was never a stock held by a large percentage of institutions because they realized the risks. I continue to notice the same investors who buy terrible stocks like Sirius have a habit of buying trash like Krispy Kreme (KKD) and a host of others. People, if you really want to play this investment game, you need to start figuring out these things on your own. Otherwise, leave the investing game to the pros because the really sharp guys out there know what's going on and they sure aren't going to tell you. And you cannot count on Wall Street to help you. While the Goldman analyst is dead right, I find it remarkable it took him so many years to issue this report. I'm not sure whether he just isn't that bright or his focus was on landing banking business. Most likely, it was the former since I still have not read any report that provides the insight I have.
Wall Street makes sure investors have a misguided sense of reality by issuing so many "Buy" ratings. Everywhere you look you see "experts" talk about how good it is to invest in the stock market but you never hear timely warnings when you should get out and wait for the next bull market. The refusal of Wall Street and those who control the media to even hint that there might be a period of a few years when you should stay out of the market is the reason why most investors get caught in bear markets.
Going forward, if you want to have a chance as an investor you're really going to need to change this mentality. Otherwise, the "do-it-yourself" approach is going to result in a disaster for many. Remember, the promoters of this fantasy – the online brokers – are just as guilty of this deceit as Wall Street. And they are making profits selling you this epiphany. So you might be better off buying ETFs.
Disclosure: None
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This article has 66 comments.
I've been a sirius stock holder for the last 5 months and my price to break even is $2.62 so you could bet that I will be one of those quick in and out,sooné
How do you think internet radio beamed into cars will pay for the rights to broadcast their musical content? Do you think the artists and publishers are just going to let them do it for free once it becomes ubiquitous? How about other "prime" content, are they just going to produce it out of thin air?
Here's your problem, it going to cost them more money to establish it and they're either going to have commercials to subsidize content, or they are going to offer subscriptions. So it isn't the magic wand you are hoping for.
It's just going to be more radio with an inferior product.
It's also got an uphill battle and it's costs will be just as big.
End of story.
Slumping car sales are a back burner issue as penetration rates continue to increase and over any given period US car sales remain pretty constant with some years up and some down.
Mostly with a general bias up.
Also keep in mind that SDARS does not only go into american made vehicles. So I wouldn't over rate Ford and GM too heavily.
In any event, it really means very little as does the retail story until the issue of the merger is determined. You just can't mine the data for what it would mean going forward after a merger - period.
The i-pod story should not be overlooked. Sat rad on ANY portable device as part of a suscription becomes huge - especially for the Christmas season.
And, as I've always said, you will see a SDARS music library with subscriptions that include a set # of downloads per month with your subscription. This will be a huge marketing draw that I have seen no one mention at this point.
The NAB really does have a problem going forward as SDARS is destined to become ubiquitous. The recent i-pod story and the fact that it's making it into more and more cars everyday is driving the point home. The stocks got washed out with capitulation selling
and people are starting to understand that as well.
Upon the merger you'll start to see the forecasts ramp regarding all of the above. And the stock will climb as each and every brokerage firm will start recommending exposure to the industry for their clients.
There really will be some fireworks this July fourth. Count on it!
I attempted to on 6/25 when I made a comment on a Tyler Slavery blog at 9:19AM---interested SIRI/XM players might like to read it. It puts up a lot of numbers to reinforce the premise here.
Just for the record I established a core 5-figure share short position in SIRI 2004-2006 @ average $5.51 and will cover , I'm confident, below 50 cents sometime next two years. Also have had maybe 20 very short-term trades on SIRI short side and have zero losses on same.
You are such a very smart investor as is Mr. Stathis.
Hello?
He says out loud what most of the desperate believers on these message boards will never admit. The satellite radio stocks have practically no upside from their current levels, and there are simply too many more attractive investment opportunities out there.
This is not arrogance. It is a simple acknowledgement of the economic and business realities of satellite radio.
Both companies have leveraged themselves beyond the point of redemption, overspent carelessly on advertising and talent, and have generally overextended their cost structures while making wildly optimistic assumptions about subscriber growth, retention, and profitability.
Even the airlines and wireless providers (also with high debt levels) know enough to create programs that will retain customers, such as frequent flier programs and 2-year contracts. The satrad companies have built no exit barriers into their business models, while taking all future growth on consumers' proclivity to buy a new car. With the credit markets locked, and fuel at $4.50 a gallon, it doesn't take much to connect the dots to satrad's dark and grim future.
To those of you who are long, it is not too late to save face and sell. But the longer you cling to your flimsy hopes and wishful thinking, the more it is going to cost you.
IF I am wrong, and the price gets up to the $4's, for example, my profit cushion will enable me to cover with, albeit smaller, gain.
Different subject---Martin's conditional approval of the merger was announced two weeks ago and it is a very good assumption that the merger will go thru probably exactly as he stated. All the SIRI longs have long awaited such a thing as the virtual second coming and the stock did zoom for a few trades the first trading morning.
BUT that was short-lived, and PPS has been significantly lower for well over a week. How come?? Do a few negative comments from GS negate the 17 months of merger hoopla?? I would be interested in opinions of SIRI PPS one week and one month after merger is official. I'll start it off by saying $2.40 then $1.90.
By your estimate, I have to wonder why radio stocks such as CCU are not much much lower. After all, they will be put out of business by this also. Content is and always will be king. Weather it is terrestrial or internet unless it is a paid subscription you are going to have less of it and of poorer quality. Same reason people pay for cable/satellite tv. I am sure many like you, back then thought no one would pay for something they could get for free, except it was not the same content was it.
I am glad I never listened to people like you when it came to DISH and DTV. I would still be working for a living. Yes that is right I heard the samething then also. The cost are to high, there is already to much competetion, they are carring to much dept, ect., ect., ect.
"I continue to notice the same investors who buy terrible stocks like Sirius have a habit of buying trash like Krispy Kreme (KKD) and a host of others."
You really need to get two of your friends (If you have any) and have them pull on each side of your shoulders and see if they can pull your head out of you ass!
Have a nice day :)
You have no position in either stock, have not even followed the sector for years, yet here you are, mere hours or days away from a major announcement regarding the future of these two companies proclaiming your expertise and foretelling disaster?
Give Clear Channel and the NAB their money back, sir. You are far too transparent.
The Vicar of Value is of independent mind, with no business or financial ties to the author, to the NAB, or to either satellite radio company. He holds no position in either, and does not seek to due to the high opportunity costs associated with investing in unprofitable satellite radio companies.
When these people are looking at the same quaterly reports.
When you go to school and at the end of a session you're report card reflex on the grades you've accomplished during that session. And not 4 different grades.
So why is this so chineese?
I do wonder if he has any articles telling us of the terrestrial radios doom also.
You are just wrong. There is no "free internet". That fact completely defeats your thesis.
Scot's Slant.
He told me on a prior post that my investment decision were poorly chosen becuase I too quickly jumped to conclusions in identifying him as Dave, another personna he uses on Baron's articles. You see after the same monologue that he is providing here, "Dave", the Vicor, when questioned by me, had already told me he wasn't invested in these stocks. He was saying the same things, and adding nothing to the analysis of the business model for Sat Rad. just continuously criticizing our investment choices. What would be his motivation for investing all this time on boards discussing stocks he's not invested in? MMMMMMM. Now here he is as "Vicar of Blah, Blah, Blah", admitting that he is not invested in either of these companies. I am not addressing this to The Vicor, Dave, or whoever you are as you try to incite these boards. I am simply cautioning folks to beware of wasting to much time with the dribble or the dribble of the author of this article, using a 3 year old analysis. That was before a merger announcement, when these two companies were killing each other with competition. No numbers in the article and Internet Radio in the car is the replacement For SAT RAD.......Please.
On Jun 29 01:25 PM Vicar of Value wrote:
> WFC is actually a shill for Mel Karmazin, to defend this financially
> struggling company. I just had my source confirm WFC's IP address.
> It's sad that these desperate apologists for satellite radio are
> allowed to impose their misguided political agendas on message boards
> such as Seeking Alpha.
I love the stock market. I can look for value in all sorts of places. If everyone was touting the praises of satellite radio, the valuation would likely be unrealistic. However, the is a disproportionate number of bashers that have managed to pummel this stock into the dirt.
Do you ever stop to think, Sirius and XM have a proprietary satellite network...in orbit! Soon, they will have joint access to the 25mhz spectrum, opening up limitless possibilities!
You have not followed these stocks for three years.... Well then you may not know that both companies have combined subs of nearly 20 million! Do you know what number is considered a national market, looked upon by large advertising firms? The experts in the ad industry...
Lets look at price elasticity of demand. It's a simple economic term. If you took an econ class, you'd likely know it. I would guess Sirius and XM do not have inelastic subscribers. Therefore, there is elasticity in the SDARS business model. The Al La Carte is very likely to drive retails sales. I recall hearing that the iphone price reduction is likely to double or triple sales. Apply this logic to Satellite radio! Then consider for a moment that some households have multiple subscriptions!
IN MY WORDS, AND MARK THIS COMMENT, WALL ST. GET READY FOR THE EARLY MAJORITY IN SATELLITE RADIO.... WE'VE HIT CRITICAL MASS AND THIS THING IS GOING TO ERUPT!
219355, I already covered that to in a post before. It is why Mike is also an idiot
Merger Mania and sjpinsea, very good points.
WFC, I absolutely agree with most of your post at 3:55 PM. I have said it from the begining That is also why SIRI poped from 6 to 9 alot of people thought that much of Mel (while I like Mel, I did not think it dictated the stock being that high though). He is no dummy, he knows full well what he was doing when he took a pay cut to come to SIRI. I will go into more detail about that after a decsion is made.
Seamless82, shut the hell up until the decision is made. The next thing you will see, is somebody using the 25mhz reason as to why the merger should not go through.
WFC, I would say Mike is very intelligent. There were alot of intelligent people foretelling the downfall of satellite TV also. He is a bafoon because he also does not look at both sides of this sector though. He has let his bias get in the way, to say internet radio is going to be the main reason for the downfall of satellite radio shows that bias. Internet radio has more problems then satellite radio right now, the least of which is how to be put it in cars and have a constant signal every where you go not just in the cities big enough that WyFi has been made avaible, which still has not happen yet by the way. Internet in cars well be to expensive for most companies to want to take the risk to subsidize it (also the reason they pulled out of subsidizing it, in the cities). People are down on satellite radio because they have such a dept load. Where do they think more then half of that dept came from. How much do they think it cost to put a 100 plus subsidy in well over 15 million cars to date. I have said it before and will say it again they are paying ahead for the growth. they may have been profitable by now if they would have left penitration at 15%, or 20% the highest price points of the OEM market. The all in churn would have been almost nonexistant and so would have the selfpaying churn there would have been almost no waste because almost every radio would have had a subscription. The growth on the other hand would have been almost at a snails pace though.
If only you drab schmucks would have listened to me, you would be happy now... but alas, you chose to ignore my supreme intelligence and debonair looks.
Ta-Ta, I'm a busy and important man who would rather not be bothered by your ilk.
SIXM will be offering free/limited commercial satrad with commercial free / premium paid programming < 14 months.
Why has the NAB been so vehement over a piddly little 18 million subs? ... It wasn't just about the merger, it's the cash flow that permits the launching of an additional revenue stream. You see, we have a national content player entering the 4 billion + ad market.... and it's SIXM.
Lovely, lovely.
After reading all the comments, I have to conclude the crybabies are long the stock. Stop crying and at least act like adults. I haven't seen any intelligent responses, just a bunch of crying. Stathis basically implies that inexperienced, unknowledgable people bought this stock. After reading the comments, I must say I agree.
Growth is limited when you are charging $13/month, shelling out millions to Stern and Execs. What happens if they reach 60 million subs? Do you really think they could ever go past this? Its all about earnings growth and a $13 cost wont get you there. I agree with the author. The business model is weak. Internet radio will be a big problem.
While you may have been right about previous bankruptcies, to me this sounds more like the people claiming cable TV would go nowhere... why pay for tv? Why buy sat rad when net radio will be free? Maybe because with data access and content access, Sirius will be a better deal! Until WiMax or whatever is here and cheap and we can listen to the same content, i.e. CNN, CNBC, BBC, NFL, Sterm, etc., etc., then net radio is no competition. Besides, the infrastructure is not available and won't be affordable for years. Remember, Sirius comes in when you are in the middle of nowhere. The net has a lot of catching up to do. Meanwhile, it is built in to more, not less, new cars.
Guess what? When Net radio in a car does eventually happen, SIRI will likely be bringing it to us becoming a top notch Internet radio provider.
Content is king!
May I suggest a little humility.
A little humility goes a long way----
Quite frankly,
If he was correct, the NAB would not have spent millions of dollars fighting the merger!
[Comment edited for abusive language. Commenter put on notice]
The notion that they will assumes a perfection scenario that is, in The Vicar's humble opinion, wildly optimistic.
You've heard FM...it sucks, too!
Get Sirius/XM Satellite Radio...The Best Radio on Radio
Sirus/XM...Finally, radio that doesn't suck!"
Can't wait for that ad campaign. LOL
The indicators that apply (in my opinion) are just a few.
1. Think of Stocks as a Business-
This company already has the connections for distribution of the content via internet. A paradigm shift to smart devices (ala Slacker.com) is not that far fetched. The next generation of radios has potential for Ad media on music channels via the mini screens while still providing commercial free (Audio) content.
2. Increase the size of your investment-
Going all in is not a good idea. Although, the Goldman Sachs opinion is a very conservative take on this stock, it points to the fact that the price is near the bottom. I can't predict the bottom, but with the recent press announcement by Mel, we are looking at imminent FCC approval.
3. Reduce Portifolio Turnover-
A good majority of the sour grapes are based on "investors" wanting a quick out. This is never a good application of investing. If you want a sure thing, bet on number 3 in the fifth race at Pimlico.
4. Develop Alternative Benchmarks -
A detailed study of the SIRI stock will reveal the success of the company with or without the merger. Using the current stock price as the Barometer of how well it will do is like saying the Presidential Candidate will win the election, if he takes Florida.
5. Learn to Think in Probabilities-
The probability of FCC approval is very likely. This being said, make for a very attractive acquisition of the SIRI stock. The probability of the FCC denial is political nightmare for politicians.
The loss of either, or both companies, will alienate sports fans (which are voters)
6. Recognize the Psychological Aspects of Investing -
Buffet says it better than I could:
“Retain your belief in the real fundamentals of the business and to not get too concerned about the stock market."
7. Ignore Market Forecasts -
Another Buffet direct quote: “Be Fearful When Others Are Greedy
And Greedy When Others Are Fearful”
8. Wait for the Fat Pitch -
The option of having reduced my options, versus investing in others avenues, Financial, China, Oil, Precious Minerals, places this in the middle of the plate. So....swing batter, swing batter
Bottom line:
This article was wonderful! It introduces additional controversy on an already hot topic. I am not a paid professional writer, but
"It's not that I have a crystal ball or that I'm amazingly clever; it's just a matter of using some common sense combined with an understanding of business dynamics and competitive forces."
People love controversy, this article goes a long way to that Point. Up until recently, discussing Satellite radio was like watching paint dry. Reading an article like this (and the associated comments) is like watching Jerry Springer. Thanks to everyone who contributed. I may not agree with your opinions, but they certainly are entertaining.
These eight items are derived from the Oracle himself.
www.investopedia.com/a...
On Jun 30 12:41 PM Sirius Fan wrote:
> "You've heard AM...it sucks!
> You've heard FM...it sucks, too!
> Get Sirius/XM Satellite Radio...The Best Radio on Radio
>
> Sirus/XM...Finally, radio that doesn't suck!"
>
> Can't wait for that ad campaign. LOL
Just read the headlines: GM sales fell 19 percent, Ford was down 28 percent and Toyota dropped 21 percent in June over the same period a year ago.
Starbucks is shuttering 600 stores over declining sales.
Who buys satellite radio subscriptions, gentlemen? The same people who buy new cars and frappuccinos.
The writing is on the wall, folks. If these stocks outperform the market, it will be through luck and circumstance, and not through any insightful epiphany on your part.
My hunch is that even if the stocks pop, you won't sell. You'll ride it all the way back down because you'll be consumed by the illusion that they're headed higher.
That will be the inevitable consequence of not being to identify, articulate, and justify your sell price. Pity the E-Traders out there, they're all the same. I'm glad they don't manage my portfolios.
Your disappointment will be palpable if the FCC approves (unlikely now before September) and the stocks don't move much.
There is more downside coming. Are you sure that of all the publicly traded companies and mutual funds accessible to you, that these unprofitable satellite radio companies are really going to give you the best possible return for the level of risk you're assuming?