I love listening to sports and music when I drive, but I hate having to suffer through the frequent commercials. That’s When I change the channel or put on a CD. Luckily, I now do not have to be relentlessly subjected to useless commercials. I have a new choice: satellite radio.
Based on the trend in demand for satellite radio, millions of listeners like me want more music, news, and sports variety in a mostly commercial-free format. The service is fantastic. Now, if only we could move to a commercial-free television format.
In the satellite radio arena, there are two major players in the United States, both of which are growing exponentially.
Sirius Satellite Radio, Inc. (NASDAQ/SIRI) provides commercial-free music channels, along with sports, news, talk, entertainment, traffic and weather programs. As of April, Sirius offered 120 channels of programming. Obviously, listeners like what they are hearing, as the company has signed up about 1.5 subscribers and it expects another 1.2 million by the end of this year.
Rival XM Satellite Radio Holdings, Inc. (NASDAQ/XMSR) offers about 150 channels, but, with about 3.8 million subscribers, has two and a half times the number of subscribers that Sirius has. XM estimates adding another 1.7 million subscribers by the end of this year. The business model is based on a $12.95-a-month subscription fee, which, in my view, is an excellent source of recurring revenues. Once you get the subscribers, everything else is gravy.
The battle between the two rivals is heated. Hardware required for the customers to receive each service is non-compatible, so automakers had to decide which service to offer to car buyers. However, now it appears some automakers have shifted to a policy of allowing buyers to choose between Sirius and XM.
The trend is clearly positive for satellite radio, as demonstrated by the annual growth. It is in the early stages of the product life cycle, and, based on the growth so far, the numbers are staggering.
Nevertheless, there is a problem. Do the current valuations justify the growth potential? Let’s take a brief look at the comparative valuations.
Sirius, with a market-cap of $7.77 billion, trades at a whopping 78.29x trailing sales. It is not expected to be profitable for at least the FY05 and FY06, and who knows when after that. The cost of acquiring listeners is high, and it will take time to pay for itself.
XM, with a market-cap of $7.04 billion, trades at a more reasonable 23.16x trailing sales. However, like Sirius, it is expected to be in the red for at least the FY05 and FY06. While the losses mount, so does the debt load. XM currently has about $1.08 billion in debt or about 4.876x equity.
Nevertheless, while the current valuations are hefty, the strong growth potential inherent in these two market leaders may actually justify the current price. Of course, this is highly dependent on the demand for satellite radio to continue its explosive trend. Street estimates peg the five-year annual earnings growth at 33.5% and 35% for XM and Sirius, respectively.
I believe the trend for satellite radio will remain positive, but Sirius and XM must continue to deliver on the subscription growth to validate the valuation.
At the current valuation, these make Internet search engine Google, Inc. (NASDAQ/GOOG) seem like a value stock! The short sellers are out in full force, especially with XM, with 28.10% of the float or 58.37 million shares in the hands of short sellers as of May 10.
So, despite my love of commercial-free listening, I’m not sure if I would put my money in either XM or Sirius at the current valuation. Hey, I may be wrong, but at least I can drive to the beat!