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Get Sirius? Not until the company does
The satellite radio company writes a sharp press release, unless you care about profits. Until making money becomes a Sirius priority, don't touch this stock.
By Robert Walberg
Reading Sirius Satellite Radio's earnings release Tuesday reminded me of the bad old days of the Internet boom.
The release started off by highlighting the firms 250% jump in third-quarter revenues. Nothing too unusual about the number's high placement, especially given that it's plenty impressive and ahead of Wall Street estimates. But the next few bullet points dealt with either subscriber growth or gains in market share. What about income?
That little detail was buried in paragraph seven -- several paragraphs after a discussion of how Martha Stewart Living Radio and Howard Stern's arrival in January 2006 would generate unprecedented excitement for the service. Well, what would have generated unprecedented excitement for this analyst would have been some indication that Sirius Satellite Radio (SIRI, news, msgs) had figured out how to turn growth in subscribers and revenue into profits.
Mastering the wrong skill
No such luck. What we did discover way down in paragraph seven is that despite revenue growth of 250% and net subscriber growth of 97%, Sirius posted a net loss of $180.4 million, or 14 cents a share, compared with a net loss of $169.4 million, or 14 per share, in the same period last year. I guess if your net loss rose by 6.5% year-over-year, you might want to downplay it too.
You see, Sirius Satellite Radio has mastered the public relations game, but it is still a long way away from mastering its business. To the contrary, the company continues to lag well behind its chief rival XM Satellite Radio (XMSR, news, msgs) in terms of total subscribers and market share. A new deal with Ford Motor Co. (F, news, msgs) and an extension of its deal with DaimlerChrysler AG (DCX, news, msgs) to provide factory-installed services will certainly help bolster subscriber growth at Sirius going forward.
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However, if the company ever hopes to turn a profit, it is going to have to figure out how to lower the cost of subscriber additions. It made some progress on that front this quarter, as subscription acquisition costs (SAC) dropped to $149 from $229 the year earlier. But with the big money the company has thrown at Howard Stern, Martha Stewart and the National Football League, it must do much, much better.
Management noted that it expects to bring SAC down to $145 by year-end, but even thats well above the point of profitability. And without any near-term hopes of becoming profitable, how much longer will investors continue to pay an outrageous premium for the stock? Consider that after yesterdays hyped-up gain of almost 6%, Sirius Satellite Radio shares now trade at an Internet-boom-like 47 times trailing 12-month sales. Thats nearly 3.5 times the price-to-sales multiple accorded industry leader XM Satellite.
When $13 a month is too much
Why the continuing infatuation with a company that continues to lose more and more money even as it adds more and more subscribers? In a word, spin. Investors are asked to believe that the unlikely combination of Howard Stern and Martha Stewart is going to compel thousands upon thousands of customers to plunk down upwards of $12.95 per month for Sirius Satellite Radio. Nice try, but dont think so.
First of all, consumers already are feeling the pinch of higher energy prices and rising interest rates. The option to spend nearly $13 a month on something they can already get for free just doesnt add up. Second -- and I dont mean to kick her when she's down -- but Martha Stewarts popularity isnt exactly on the rise.
Are we really being asked to believe that a significant number of people are going to spend $155 per year for the privilege of hearing Martha on radio when she is already on TV? This is the kind of nonsense we were all fed back during the go-go Internet days. Supposedly, we had learned our lesson. I guess not.
Until Sirius starts taking investors seriously and focuses on profits rather than public relations, investors should tune out. Any near-term gains should be viewed as a selling opportunity.
At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.
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