I have a love/hate relationship with Sirius XM Radio (NASDAQ: SIRI ). My wife
enjoys the commercial-free music while traveling for her job, and I use it on my
computer while writing. That's the love part. Unfortunately, don't ever try
to get them to resolve customer service issues resolved in a timely matter.
It's impossible. I'm going on three months for a very simple issue, and
I'm doubtful a resolution is imminent. That's definitely the hate part. This
entire process has me wondering about the business itself. It's a perennial
money loser, yet investors seem enamored by it. Considered a cult stock by some,
this is not something ordinary investors should own. Here's why. Customer
Service Don't underestimate the value of good customer service. Amazon
(NASDAQ: AMZN ) paid $928 million, or 35 to 40 times EBITDA, in 2009 to acquire
Zappos.com, the online shopping site known for its customer service obsession.
It's so good at helping customers that it now consults for other companies in
addition to running its own business. I doubt many businesses seek out Sirius
XMs customer service expertise. In fact, from everything I've read online , it
seems to be doing everything in its power to scare customers away. Honestly, if
my wife didn't need satellite radio for her job, we wouldn't be subscribers.
On average, Americans will tell nine people about a good customer service
experience and 16 about a bad one. With so much at stake, you would think Sirius
XM would want to do better. I guess a near-monopoly has something to do with its
indifference. On customer service alone, you would have to be insane to own this
stock. Subscribers Sirius XM Radio has the same royalty problem that Pandora
(NYSE: P ) has in that an increase in the number of listeners results in higher
royalty payments. In 2011, it's expected to pay 7.5% of gross revenues. Last
year, it paid 7%, or approximately $168 million, for those rights. In the first
six months of 2011, it has added 800,000 subscribers at $11.53 in average
revenue per month for a total of $55.3 million, resulting in an additional $4.1
million in royalties. In its Q2 press release, the company said it would add 1.6
million subscribers in 2011 at a cost of $8.2 million in additional music
royalties. For the entire fiscal 2011, it will pay $188 million in royalties, a
12% increase from 2010. That doesn't seem to be a big deal until you realize
that revenues only grew by 6% year-over-year in the first six months of 2011. If
it has any hope of consistently making money, it has to find a way to stem this
tide. I don't believe it's possible. Profitability The company expects free
cash flow in 2011 of $400 million on approximately $3 billion in revenue. Last
year, it generated $210 million on $2.8 billion. It will almost double its free
cash flow margin year-over-year. While impressive, it still only works out to 6
cents in free cash flow per share, meaning its stock trades at a multiple of 30
times FCF. Although Amazon has an equally high multiple, it also has $6.4
billion in cash with no debt, compared to $528 million in cash and $3 billion in
debt for Sirius XM. Over 10% of every dollar it earns goes to servicing its
debt. The big question mark and I suspect the reason this stock gets so much
coverage is understanding where operating margins go from here. In just three
years, it has moved from an operating loss of $5 billion to what will likely be
a $660 million operating profit in 2011. If this continues, it has a decent
chance of eliminating some of its debt in the next few years. That's a big if,
however. Bottom Line Sirius XM, despite its potential, has three strikes against
it. First, it has lousy customer service. Eventually, this will come back to
haunt it. Second, the number of subscribers will plateau as Apple (NASDAQ: AAPL
) and others come up with interesting, cheaper alternatives to satellite radio,
and finally, the debt noose around its neck will become a serious problem if the
economy continues to sputter. With the markets as volatile as they are right
now, I don't know why any investor, other than traders and speculators, would
own its stock.
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