The market is a forward looking instrument. Taking all relevant information and projecting such information into a forecast of future profits, the market discounts future cash flows to determine a present value.
At least that is how it is supposed to work with stocks. Fortunately for us, the market is not always efficient at this complex process. Stock traders and investors that make up the marketplace simply get it wrong on occasion.
At those times investors need to pounce. Taking advantage of these inefficiencies, is one of the best ways to beat the market and generate stock market profits.
One stock the market has been entirely wrong with respect to discounting future cash flows is Sirius XM Radio, Inc. (SIRI). Short sellers and skeptics have absolutely pummeled the stock. Case-in-point is the action in the stock maket with SIRI. The stock is down another whopping 15%. Already down substantially from its 2004 high of approximately $9, the selling this week puts more salt on the wound.
The cause is actually old news that should have been already anticipated by the market. Specifically the company announced that subscriber numbers for 2008 and 2009 would be lower than previously thought. SIRI now expects to end the year with 19.5 million customers and will add another 2 million to that number in 2009. That 2009 growth is a mere 10% and is a far cry from the heady days of 100% subscriber growth seen over the last five years.
No kidding or should I say, “Duh”?
I’ve written previously about the devastating impact of the delay in approving the merger between Sirius and XM (see, “Sirius (SIRI): Cutting Through the Noise“). The government at the pressure of traditional radio lobbyists has nearly destroyed the company as a result of withholding merger approval. The actions of the Justice Department and the FCC were unprecedented interference in capitalism. The consequence for shareholders…> was a reduction in market capitalization that continues today (see, “XM-Sirius Merger: Regulatory Bull“)
Essentially SIRI lost a full year of operations due to the delay. Marketing efforts were minimal and losses mounted as competition with XM prevented the company from realized its full potential. The timing could not have been worse. Car sales plummeted and the U.S. economy weakened during the dead time. Buying satellite radio is a luxury item that consumers will defer given worries over job losses and personal finances.
SIRI Takes Off
The fact is, slower subscriber growth in this U.S. economy should be no surprise. Frankly, I think the market should celebrate this performance. Most companies under similar circumstances would have simply collapsed.
That is not the case with SIRI and demonstrates the strength of the opportunity. The market is simply missing the boat and the stock is massively undervalued in my opinion.
What about the future opportunity? What about the massive cost savings that the company can expect as a result of the merger? What about giving the company some time to figure out a game plan coming out of the 18 month dead zone?
Give me a break. Not one investor is appreciating the future potential of SIRI. Read my lips: SIRI is a monopoly that will be rolling in cash flow once it gets its act together.
Give it some time. We have no idea what this company can do as a single entity. Everything is on the table including higher prices for premium services and advertising.
Oh, and I suppose the US will be in recession forever. Please!
This company will be rocking and rolling in no time. Ignore the current inefficiency and rest easy. The profits are coming, the profits are coming.
