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Originally Posted by SenatorKevin
There are only two reasons to own SIRI.
1: They will find a way to refinance all their debt in 2009. - Less and less likely each passing day.
2: They will get bought out by some firm. Even less likely because of #1 and the general M&A scene.
Vonage (VG) is in a similar boat where they basically offer a service that simply has better substitutes (at least in the US market) They were able to refi their debt, but the credit markets were more favorable at the time.
Comparing a commodity business like Vonage to a consumer monopoly like Sirius is about as wrong a comparison can get.
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You're more likely to see Bush get elected for a 4th term in 4 years than you are with this stock being a "ten bagger" in the same time frame. Do you really think this stock will be worth 30 billion dollars in that time frame? (Maybe you think inflation is going to go crazy.)
It's not inflation. SIRI did $1.9B in revenues last year, they are predicting $2.7B next year. $4B in revenues in four years is a very reasonable prediction. And given the huge cost savings the merger created, their GAAP earnings should be at least $500M and their cash earnings will be double that.
Now do I think the market will put a $30B valuation on SIRI? No, if I did I would buy it now, I used 10 bagger as an example of the potential, it's the upper bounds of what's possible in four years. But it's hard to think a business with $500M in competition insulated GAAP earnings growing 15% a year is going to be priced much less than $15B by the market at that time.
And if it hits those numbers, a 10 bagger is almost pre-ordained in years 5-6, and a 20 bagger before year 10. It's not so large a business that it's growth will slow substantially anytime in the next decade.
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Anyways, I think SIRI is affected by the fact that some people think the stock is cheap solely because it's listed at a buck... but some people forget that a dollar stock can be expensive when a fifty dollar stock can be cheap.
I just don't think you've really read their financials or thought about their business much. First, this is a consumer monopoly. If you want high quality music, hundreds of channels, every major sport, or popular entertainers like Stern in an uncensored environment in your car, there won't be any other choice for a long while.
Stern, the NFL, NBA, MLB, etc, won't have another satellite service negotiating for their services any more that they can use to driving up their asking prices. And they can't go anywhere else, because of censorship or lack of channels to carry an entire game schedule. Not only does this lower Sirius costs over time as these deals are renegotiated, but it increases product demand because now subscribers don't have to worry about which service to get, they get everything on either Sirius-XM platform. The product just became more valuable because of the merger, and they are also charging more for the combined service.
And now they no longer have to give stock and subsidies to auto-makers to win deals. You can't sell a car anymore without have a satelllite option, and Sirius can now charge for their costs in making that happen. Their costs dropped and distribution widened.
And then half of their marketing department just disappeared. A big chunk of R&D, and engineering (transponder maintenance) disappeared. G&A has been slashed.
If WiFi becomes predominant in cars, they can put their satellites on maintenance mode and transition customers to the internet and their capital costs drop dramatically.
While the scenarios I painted here are the upside, there are of course risks. First is being heavily diluted by the aforementioned debt refinancing. Second is growth being slower, or the cost savings being less. I actually think their growth rate may increase over the next year or two because they will no longer be selling against each other, the merged products are more valuable and customer confusion will decline dramatically.
Nothing is set in stone. Like I said, if I was certain a 10 bagger was achievable in four years, I'd already be an shareholder. I just don't like tying up capital that long when I have very high return shorter term opportunities. But I wouldn't be surprised if Bill Miller is already a large shareholder. This is just the type of investment idea that made his fund so successful (before it became too big).