Sirius Satellite Radio: Expecting Extreme Profitability
posted on: October 26, 2007 | about stocks: SIRI
Sirius Satellite Radio (SIRI) provides satellite radio services throughout the U.S. We have watched this stock with all of its associated hype since the addition of Howard Stern, sitting on the sidelines as SIRI's shares plummeted from $9 dollars to the current $3.50 level. Well, at the current valuation, we are no longer bystanders.
The bears view the current situation as unsustainable. Specifically, competing against free AM and FM alternatives is difficult and launching new satellites into orbit is extremely costly. Moreover, the duopoly of XM and SIRI results in very poor content contracts and extraordinarily high marketing budgets. That is, each company bids up major contracts, such as Howard Stern, Oprah, MLB, NBA, Martha Stewart, etc., and ends up overpaying, which makes earning a ROI nearly impossible. Each company also spends a lot of money on marketing due to fierce competition for subscribers.
Despite all the negatives, we believe that the satellite radio industry is viable and ultimately that SIRI will be extremely profitable. While it may be a tremendous tailwind to SIRI shares, we are not buyers simply due to the proposed merger with XM (although we do favor the deal passing). In short, we view current and historic SIRI losses as investments for the future. Satellite launches (with their related financing and D&A expenses), relationships with the auto manufacturers, and the rich marketing and content budgets (all the negatives discussed previously) are all investments for the future. At some point, SIRI will stem its losses and ride the return on its considerable investments.
(Anecdotally, we have historically viewed satellite service negatively, until recently purchasing a Ford vehicle with free SIRI service. We were impressed with the company's content, which provides further support in our thesis. Like Warren Buffet says, which he calls his "circle of competence," you should "buy what you know.")
While XM and SIRI may both be good investments, we view SIRI as a comparatively better investment due to its superior content and choice management team as well as its higher growth rates.
Disclosure: none
Dominic Brault
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