Sirius Set to Sink

This column was originally published on RealMoney on Dec. 5 at 9:04 a.m. EST. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.

Monday, Sirius(SIRI Quote) lowered its 2006 subscriber guidance from 6.3 million to a range of between 5.9 million and 6.1 million. Shares are down 6% in premarket trading, and I believe they're headed lower.

I have written about Sirius as a stock to avoid for the Stocks Under $10 portfolio based on the probability that subscriber guidance would not be met, which drew enough response that I had to expand on my points for RealMoney. I'll sum up my argument quickly here: Last year, during the December period, Sirius added 1.1 million subscribers. Back then, satellite radio was one of the hot holiday items and Howard Stern had just announced that he was leaving terrestrial radio to begin broadcasting on Sirius.

Back in August, Sirius announced it had added 600,460 net new subscribers in the second quarter. In October, the company reported 441,000 net new subscribers for the third quarter. Those additions gave Sirius 5.1 million total subscribers. Now, for Sirius to meet its estimate of 6.3 million net new subscribers, it has to add 1.2 million subscribers without the catalyst of Howard Stern during a holiday season when satellite radio isn't on anyone's shopping list.

Following Monday night's announcement, Bear Stearns downgraded the stock from Outperform (Buy) to Underperform (Sell). This will be the second analyst out of the 32 covering Sirius to give the stock a sell rating. As of today, 19 analysts have either a buy or a strong buy rating on the stock and 11 have a hold. The unusually high amount of buy ratings is surprising, given that Sirius is trading just pennies off its 52-week low.

Based on the possibility of further downgrades and my belief that the updated guidance may still be aggressive, I believe shares could fall further in the short term. I stand by my earlier target for this stock of $3.