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 XM’s 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.