Sirius XM: Investors Should Be Angry, But At Whom?

| About: Sirius XM (SIRI)
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I know I am an idiotic short-selling scum, bought and sold by hedge funds to drive Sirius XM (NASDAQ:SIRI) into the abyss. Or that's how you feel if you're talking about Sirius XM's revenue miss and post-earnings stock price decrease in your therapist's office this morning and being told you're rationalizing holding on to your $2.50 calls.

I'm a fool. And, while we're at it, we might as well call Seeking Alpha's Cameron Kaine one as well.

Cameron Kaine, 2/6/12: The reason is simply that the market has told investors over the past several weeks (by virtue of its $2.18 resistance price point) that the stock is now fairly valued. But this is not to be interpreted as the insult that some may perceive it to be ...

My concern for the upcoming announcement on Thursday is that the company may not even take the bat off its shoulders and instead takes a free pass to first base ...

I continue to think that if Sirius wants to become the market darling that many of its investors think it should be, it needs to start giving Wall Street what it wants. Until it shows that it can do that on a regular basis, hitting majestic home runs in "small stadiums" will be perceived on Wall Street as ... well ... hitting majestic home runs in small stadiums.

Rocco Pendola, 1/27/12: The company absolutely must tell us more than we already know. There has got to be some meaningful piece of fresh news, a guidance hike or better-than-expected subscriber sightings shaping up in 2012 or the stock will sell off on the report or shortly thereafter.

Sure, part of the reason for this shout out is to toot my friend's horn while I hold my own horn in my hand (that sounds strange). I'm not too proud to admit this; however, there's a lesson we can all learn here, particularly those of us who own out-of-the-money SIRI call contracts. You should have sold them.

To be fair, Sirius XM did raise EBITDA guidance for the year (cough) and the stock essentially opened sideways. That's good and bad. Good because you have time to sell. Bad because history will more than likely repeat itself with another drop below $2.00. But even if that does not happen, as an investor, you have to ask yourself how in the world can the company miss revenue estimates?

Show me a company that uses a subscriber-centric model that continues to increase subscriber numbers, yet miss on revenue. But forget the miss, revenues only grew 7% year-over-year.

Sirius XM is not even as dynamic as ... DirecTV (NYSE:DTV). Last quarter, DirecTV increased revenues by 13.6% year-over-year on 4.4% subscriber growth. Unlike at Sirius, where subscriber acquisition costs declined by 5.2% year-over-year, SAC at DirecTV increased 2.4%, which might help explain the company's Q3 EPS miss.

Even while mired in an implosion of epic proportion, Netflix (NASDAQ:NFLX) managed to drive revenues 43% year-over-year on 25% subscriber growth. That company will not hit the skids on all counts until this quarter hits the books.

The numbers at both Netflix and DirecTV, as well as anecdote (Netflix emails and TV ads, aggressive DirecTV retention efforts), show that sales and marketing/SAC costs are up at both companies. If you look at the line item, SAC at Sirius XM increased by 8.1%, while sales and marketing popped by 15.2%. Remember, sales and marketing at Sirius XM primarily includes advertising and customer retention and communication efforts, while subsidies paid to automakers and other partners comprises SAC.

So, what does this jumble of numbers mean? Here's what I pull out of it. It should scare the living heck out of you that this company missed on revenues. I don't care if they missed by a dollar or a million. They missed estimates. And revenue only grew by 7%. That's pathetic for a company apparently in a growth phase.

What should we expect to see happen as Sirius XM now hits the inevitable wall of slowing subscriber growth that all companies running a subscriber-centric model hit? I'm not sure we will see revenue grow by much more than we've seen in the past as churn offsets any positive impacts from the company's recently-announced and relatively modest price increase.

Here's the crucial endpoint. Why bother spending anything on the business when you pour it into a core that rarely squeezes out double-digit revenue growth? And, keep in mind, Sirius XM operates in a broad media space where anything but double-digit revenue growth should be unacceptable to management, let alone investors.

It seems like a pretty poor ROI if you have to pay off automakers to get into their dashboards and then milk a profit out of modest - and that's being kind - revenue growth. Money does not exchange hands when Pandora (NYSE:P) gets into the car or becomes part of a consumer electronic device. Instead, the company invests its cash in the hyper-growth areas it has only begun to cultivate after being around for about as long as satellite radio.

Sirius XM is not a blue chip company. And, at this rate, it never will be. This is not the time to boast about free cash flow, improved EBITDA and the ability to buy back stock. That's smoke and mirrors. Mel Karmazin needs to tell investors the real story. He runs Sirius XM like a slash-and-burn, cut costs at all counts terrestrial radio station that has to give away subscriptions to keep subscriber numbers stable. As part of the old guard, he has failed to hire the young blood necessary to seize the massive revenue opportunities available in the broad audio entertainment space.

Behind the curve with a ton of cash and a load of nicely-financed debt and a comical 7% revenue growth rate and wimpy one-cent profit to show for it, not to mention a hysterical stock price that somehow manages to stagnate and gyrate simultaneously. SIRI bulls: Do not misdirect your anger and frustration at people such as myself and Cameron Kaine. Aim your scorn and cat calls at Karmazin. He's the one who deserves them.

Disclosure: I am long P.

Additional disclosure: I am long NFLX $40 put options.