It seems that a day does not go by where an article with bad information, or bad assumptions regarding Sirius XM radio is published. Writers have opinions, and that is perfectly fine whether they are positive or negative opinions. However, those opinions should be grounded in some aspect of reality.
TheStreet.com’s Scott Moritz published an article highlighting five equities that he feels may not survive another downturn. Sirius XM Radio was listed among these five equities. The fact that Sirius XM has had troubling times is not news to anyone, and the possibility exists that the company may have difficulties if there is another downturn. However, I disagree with the reasons outlined by Moritz.
In his article Moritz states:
“Tech’s hottest cash fire has finally reduced its stock to embers. The satellite radio shop has plunged deeply into red ink, accumulating a total deficit of $9.46 billion. Given that Sirius shares are trading at around 40 cents, it’s obvious that investors aren’t confident that pay radio stock has much upside.
Sirius lost customers for the first time ever in the first quarter and is on track to lose 1.6 million subscribers this year. Free cash flow for the first quarter was a negative $4 million. With so much riding on new car sales, Sirius faces big challenges this year.
A likely scenario is that Sirius will collapse into the arms of its lifeline creditor and big debt holder Liberty Media (LMDIA Quote), owner of DirecTV (DTV Quote).
With friends like Liberty Media waiting in the wings, Sirius equity holders have reason to worry.”
Lets look at Moritz’s reasoning in layman’s terms. Moritz lists as a concern the fact that Sirius XM has an accumulated deficit of $9.46 Billion. This is true, but what does that have to do with anything at this point? The number represents the total losses of the company for the length of its existence. If Sirius XM were to make $1 Billion in profits this year, the accumulated deficit would go down to $8.46 Billion. Thus, a company could still be showing a negative accumulated deficit even though there business model has turned the corner. Moritz would have been better off speaking of the debt Sirius XM currently has. That number is $3 Billion. It is the current debt that would impact the company if there was another downturn. Past debt would not matter at all.
Next Moritz deals with the stock price and investor confidence. He states that the current stock price demonstrates that investors are not confident in the company. While this certainly may be true, investor confidence is not a determining factor of a company making it through another downturn. With their debt staved off for a few years, the company is actually well positioned to ride out the storm, and perhaps another downturn.
Moritz then deals with the subscriber count, and states that the company is on a pace to lose 1.6 million subscribers this year.
