December 7, 2004. Mark it down. Today’s the day when the combined market values of XM Satellite Radio (XMSR) and Sirius Satellite Radio (SIRI) reached $20 billion for the first time, topping that of terrestrial radio giant Clear Channel Communications (CCU), which Wall Street values at $19 billion.
Sirius and XM have about 3 million subscribers, a number expected to hit 30 million within 10 years. Investors really have no idea if that estimate will come to fruition, and if it does, how much revenue (and more importantly, profit) these companies will be generating.
What we do know, however, is what Clear Channel has that warrants a $19 billion market value. As of 12/31/03, CCU employs more than 35,000 people, owns 1,200 radio stations along with 39 television stations. They also own about 800,000 outdoor advertising billboards worldwide. CCU owns and/or operates more than 100 live entertainment venues across the globe. Cash flow, measured by EBITDA, for the last 12 months totaled $2.4 billion. Sales for 2004 should hit $9.5 billion, with net income reaching $800 million.
This comparison reminds me of the 1999-2000 bubble days when Priceline.com (PCLN) was worth more than the entire airline industry and AOL bought Time Warner.
Now, its true that 10 years from now SIRI and XMSR could prove to have been bargains at current prices. However, just be aware that today’s investors are not paying any attention to valuation (mainly because at this point we have no idea how much these companies will ultimately earn), and as a result, they are basically rolling the dice rather than investing in a business.
That said, individual investors seem to think their odds of profiting from satellite radio stocks are far better than the Powerball lottery or a craps table in Vegas. If you want to short these stocks, based on a valuation that cannot be justified, please restrain yourself. The momentum here is too strong in the short term for valuation to play a role. We’ve seen this as the stocks continue to rise in the face of multiple analyst downgrades based on valuation concerns.
Unlike the late 1990’s, the analysts are now doing their jobs correctly by warning that current prices don’t make much financial sense. So, it seems most have learned their lessons. However, as those of us who have followed the markets for many years know all too well, even when analysts are doing their jobs, investors can’t rely on their recommendations to make money. On that front, nothing has changed this time around.