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No. of Recommendations: 15
Do you people realize SIRI is valued at 9000 per subscriber? Let's say you get 10x the subs, then it is valued at 900 per sub--and subs only pay in 156/ yr in revenue. Subtract Op cost, and what do you have left?

. . . Morningstar . . . "Fair Value Estimate". . . less than 10% of the current share price. . .

. . . You rabid cult-like investors are headed for a big cliff, and you didn't even bother to pack a parachutte.

I appreciate your viewpoint, ztsmart. I even agree that those who were buying in at $9 were a little nutty to do so (I bought twice; at $3.14 in May and at $2.69 in Sep, still well above your Morningstar “Fair Value Estimate”). But I view SIRI as a long-term investment with great upside potential that Morningstar doesn't consider in its “Fair Value”, thus I see things differently.

A pretty well accepted estimate of break-even based on subscriber revenue only (neglecting other revenue sources like advertising) is 15 Million subscribers. Given a US potential market of 250 Million subscribers, that's only a 6% penetration, which I believe is very achievable, in fact I think twice that is a conservative goal. Any penetration above 6% should go straight to the bottom line. Likewise, after a 6% penetration is achieved any revenue generated from advertising goes straight to the bottom line.

Assume that by 2010 SIRI has achieved 12% market penetration and has 30 Million subscribers. At $13/sub/mo, that's gross annual subscription revenue of $4,680,000,000, or annual sales revenue of $3.90/share on a float of 1.2 Billion shares. Since the first 15 Million subs will cover costs (neglecting advertising revenue), that leaves earnings of $2.34 Billion, or $1.95/share. Given these assumptions, then a conservative PE of just 15 would drive a stock price of $29.25 in 2010. That, by the way, would be a price-to-sales ratio of 7.5. And it will deliver a 1,000% return on my investment over just six years, which I consider entirely acceptable.

You are focused on the current value/sub, which you present as roughly $9 Thousand. I don't think that's right; at current price/share floating around $6 with 1.2 Billion shares in float and 1.1 Million subs the value/sub is roughly $6.5K, and is dropping steadily as the subscription number rises. My assumptions on market penetration and break-even with a PE of 15 would yield a 2010 value/sub of roughly $1.2K, or 7.5 times the subscription price. And this is with no consideration at all to potential advertising revenues, which could approach $1K/sub/anum!

Of course, the investment isn't without risk; a lot could go wrong. The satellites could die in place or just fall out of the sky (though SIRI does have a “spare”). Uncle Sam could commandeer the satellites for national defense use. War, famine, pestilence, the Patriot Act, or other disorders could destroy the sat radio market in general. But those are imponderables. The issues that I can grasp and evaluate in a rational, semi-scientific way include these:

1. SIRI's satellite position enables steep delivery angle for superior reception (fewer blackout areas even w/o repeaters) and broader area coverage, even reaching into lower Canada.
2. Satellite radio market competition is very limited; the moat is broad & deep and the only other player on SIRI's side of the moat is XM.
3. SIRI content is generally superior to what XM offers.
4. SIRI has gotten better talent for both the front and back offices than XM.
5. SIRI's internet options are currently superior to XM's, though I think this will change to parity within the next year or two.
6. XM has a head start and its subscription price is lower than SIRI, but in spite of the price differential the SIRI subs are taking off on an exponential curve and will catch up to and likely surpass XM within the next 2 to 3 years; I will begin to worry about this if SIRI has not achieved at least parity in subscriber numbers by 2008.

All in all, I still like this investment. I think the stock price is going to float for a while, but I wouldn't short it as the upside potential is too great.

And I don't think I'm “rabid”.

As always,

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