The last year or so has been very volatile for shareholders of Sirius Satellite Radio (SIRI). A deluge of retail investor buying sent the stock soaring from $4 all the way up over $9 per share. However, such a dramatic move was not rooted in fundamentals but rather a feeling that the stock was a “must own”, especially in the single digits. Sirius quickly fell back to the $5 level and settled down.
In recent weeks the momentum has picked up once again, with SIRI shares trading above $7 each. The market value of the company stands at $9.44 billion, prompting me to once again remind investors that although the share price alone seems “cheap” on an absolute price basis, the expectations of the market are indeed very high once again.
Let’s assume a very bullish scenario and project the ultimate value of the Sirius franchise. There are about 200 million vehicles in the United States. Let’s assume half of all vehicles eventually have satellite radio, and of these, XM and Sirius split them 50/50. A subscriber count of 50 million nets Sirius annual revenue of $7.77 billion. It’s conceivable that Sirius could ultimately generate a 20% EBITDA margin when it gets to be that large. That puts annual EBITDA at $1.55 billion. A very generous 15x EBITDA multiple puts a fair value on Sirius of $23.25 billion, about 146% above current levels.
Sirius began 2005 with 1.1 million subscribers. It could take 20 years to get 50 million subs, much like it did with the cable tv industry. Investors willing to wait that long have a 7% annual return over 20 years waiting for them. Hardly impressive. And that assumes a lot of good things happen in the future that have not happened yet, such as a profitable business model and a 50% market share. And who’s not to say there won’t be more than two competitors in the marketplace in the future?