Despite the Noise, Sirius Isn't Cheap

Yet neither company's business model works without automakers putting the receivers in a major portion of their 16 million new cars per year, and this is where the Sirius story falls apart. XM has successfully persuaded its main auto backers, General Motors (GM) and Honda (HMC), to install its service as standard factory options. And earlier this week came the news that it will split Toyota's (TM) business with Sirius.

Sirius, meanwhile, has not managed to get its primary auto backer, Ford (F), to do the same. Ford has said it would -- but it hasn't yet, after ample time has gone by. This should make Sirius shareholders very nervous and spook potential buyers. Toyota's decision to make Sirius a dealer option doesn't go far enough; the service needs to be a factory install, not a dealer add-on.

First Albany value portfolio manager John LaForge, who made a killing for his investors on Sirius by buying it below a buck in early 2003, says the valuation of Sirius now has overshot as much on the upside as it had previously overshot on the downside.

The Quest for 20 Million Customers

LaForge points out that the original business model called for each of the satellite providers to have 10 million customers to break even. But considering the amount that Sirius has spent to bring on Stern and major sports -- mostly by issuing stock that dilutes current shareholders and also with big bond deals -- he says he believes they need 20 million subscribers to break even. And without a working Ford deal, that is unlikely to happen. You can't get there with onesies and twosies walking through the front door at Best Buy for holiday gifts.

What drives stocks at tops and bottoms is sentiment. Pushing Sirius below $1 a year and a half ago was the fear that it would go bankrupt before ever launching its service. Pushing it up now is euphoria over its content deals.

At both extremes, somebody pays -- and it is usually the least-educated investment consumer. My guess is that both XM and Sirius will announce terrific consumer sign-up rates after Christmas, and that both stocks will decline soon thereafter, as early investors who bought on the proverbial rumor proceed to sell on the news.

Even after Wednesday's big selloff, the dollar value of Sirius still conceals a valuation that would have even made boom-era Internet companies blush. At the current price, Sirius commands a mind-blowing price-to-sales multiple compared to Apple's or even other leading-edge content delivery systems at similar stages of development, such as satellite television. It is unsustainable even at the top of the most optimistic analysts' expectations. Its seemingly low price conceals the fact that there are 1.2 billion shares outstanding, compared with, say, 50 million to 200 million shares outstanding at similarly sized companies.

And what about Apple? It has no big investment in content, so it can continue to innovate and sell its hardware at a profit while figuring out how to add high-priced accessories and movies and enjoy the follow-on effect of iPod customers switching to Apple computers from Windows machines.

For another hardware play on music, though, consider the king of them all over the past four years: Harmon International Industries (HAR). The maker of home, auto, computer and theater sound systems under such brand names as Harmon Kardon, JBL and Infinity is up more than 770% since January 2000. This year, it's up 65% -- less than Apple and Sirius, but more than XM.

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