Wall St. worries as Sirius, XM stox tank
Satellite radio is beginning a crash to earth, as XM and Sirius continue to endure one of the worst months in their histories.The last few weeks have seen the companies beset by bad news: Clear Channel won a legal battle to force advertising on four XM channels; Sirius faced Leslie Moonves’ legal wrath; and the stock prices of both have hit 52-week lows. In its most recent earnings report, Sirius revealed that net losses in the holiday quarter ballooned to $311 million, up more than 50% from the previous quarter. News wasn’t unexpected; company had warned that marketing costs associated with the launch of Howard Stern would cut deep. XM saw a $268 million loss in the fourth quarter, also reportedly on marketing costs. Company ran an ambitious campaign to counter Sirius’ Stern launch. But the financial toll of expensive deals for talent may finally be catching up to satellite radio. “The feeling was that (Sirius CEO) Mel Karmazin cast an aura,” said media analyst Dennis McAlpine. “But you start looking at the numbers of what’s going on and you think, Maybe it won’t work out.” It wasn’t supposed to be like this: The launch of Stern was supposed to further ring in an era of radio so unregulated and diverse that people would pay extra to have it. And Wall Street was supposed to fall in love, too, much as it fell in love with dot-com ideas, like Amazon.com, that put a new twist on a familiar service. Satellite radio, after all, offers a straightforward but tantalizing alternative to the maligned commercial-radio format. But the business fundamentals are proving too much for investors to ignore. The price-to-sales ratio, a measure of investment value for a company that does not yet show a profit, is a high 25 for Sirius and a little under 10 for XM; the low- to mid-single digits is considered normal. While XM subs and operating losses are favorable compared with the numbers at Sirius, subscriber acquisition costs at the D.C.-based firm actually rose in the most recent quarter. Faced with this news, the Street has not been kind. Since the start of 2006, the XM and Sirius stocks have lost more than 25% of their value. At just over $20 at Thursday’s close, XM is trading at its lowest price in more than two years. Sirius is at a 52-week low of $4.51. Both stocks have been singled out by investor watchdogs; XM and Sirius were named by MarketWatch last week to share the dubious honor of stupid investment of the week. News comes after an XM board member ankled in February over cost concerns. XM also could face subscriber objections — and a marketing challenge — after a court ruled it must broadcast advertising on four channels for which Clear Channel, an early investor in XM, provides programming. And while many observers think CBS’ Stern suit won’t hold much water, the cost of defending it won’t please Sirius, which is already plagued by cash concerns. There are some good signs. Subscriber numbers continue to rise. Collectively, the two services are approaching the magic 10 million mark, a number that would put radio satcasting into the orbit of, say, Showtime, to use a TV analogy. As subscriber revenue begins to reach a critical mass, it will start to make a noticeable impact on ongoing costs. Both companies say the all-important positive free cash flow could happen by the fourth quarter of 2006, with Sirius’ Karmazin predicting revenues of $1 billion in 2007. Sports could provide a boost as well: Sirius is making a full-court push for its vast NCAA basketball lineup, while at XM, the start of the baseball season is expected to give a bump to the service, which boasts broad coverage of Major League games. And since March began, three analysts have upgraded Sirius, with two changing their recommendation to buy. But even here the satellite cloud may have a dark lining: One reason for the upgrade is that the price is low enough to be considered a bargain.