Editor's Note: Herb Greenberg's column runs exclusively on RealMoney.com; this is a special free look at his column. For a free trial subscription to RealMoney.com, click here. This article was published April 15 on RealMoney.
I'm getting hounded by readers wanting me to write something,
, positive. Actually, every now and then I do. I just pick and choose. Do
ring a bell? Of course not, because they were stories that had no tension, no
; they were just plain vanilla value stories.
Want tension? OK, let's talk about why some people
everybody's favorite short,
XM Satellite Radio
, which offers 100 channels for about $120 a year. (Make sure you read former skeptic Jim Seymour's
first-person experience on this.) XM is a name I have avoided writing
about. Every time I got close to penning something even remotely critical, I just couldn't get a strong enough conviction. Months ago I sent my colleague Mark Martinez out to a bunch of electronics stores in San Diego to see how the radios were selling. They weren't walking out of the store, but they weren't gathering dust, either.
On one hand this is the ultimate in concept stocks, with all the ingredients of something that, on a knee-jerk level, gets me itching to weigh in with a bearish bent. Consider the key issues, which you're likely to hear from anybody short the stock.
The most obvious is whether anybody -- at least enough anybodies to make a profit -- will really pay for radio when they can get it for free. Then there's the cash issue: XM is a cash guzzler. Since 1997 it has raised about $1.5 billion in public stock and debt offerings, including a secondary offering last week that raised $154 million. It claims it'll need another $350 million or so going forward, and, so far, it has an accumulated deficit of about $391 million. Debt currently stands at about $411 million. And, hey, it's
ring a bell?
Despite all of those obvious negatives, I was startled -- no, make that
-- when several often-bearish hedge fund sources actually turned out to
XM. One is long some of the bonds, which, with a 14% yield, are the conservative route; the other is long the stock. This guy long the stock is a hedge fund manager I
listen to because, on the short side, his analysts are among the best. And on the long side, well, he gave readers of this column the likes of the turnaround at Gillette and the boom at
, back when both were nobody's favorite.
So what could these normally shrewd investors -- guys who can be as skeptical as anyone -- possibly see in a company like XM, which may not show profits for years? Why would they dabble in the kind of company whose financial statements are useless because, like Internet companies of yesteryear, so much of the story remains hypothetical?
Because, they say, you could've said the same thing about cable and satellite TV. Both agree that investing in XM at this point is a "leap of faith" that, much like satellite TV and cable (themselves the focus of naysayers in their early days), satellite radio eventually will gain widespread acceptance. They also agree the stock could be extremely volatile from here to there -- making it ripe for traders -- but that the greater risk is for die-hard short-sellers. "The risk-reward is so out of kilter," says the hedge fund manager, who says that what would scare him as a short is if the company can quickly build its subscriber base.
So far, in the seven months since it was rolled out, XM has signed up more than 76,000 customers, ahead of many analyst expectations (although many estimates had been scaled back from earlier forecasts). Of those subscribers, our bull points out, most aren't the typical early adopters, males between the ages of 18 and 35. They cut across all demographics, with the only exception being the above-65 crowd.
What's more, he says, current subscribers had to either add a new radio or replace the radio in their car with an XM radio. (Which means they had to go the extra mile to get the service.) Starting this summer, at least five car companies (including big XM backer
) have announced plans to include XM radios as an option in cars. The radios
the service charges can be financed as part of the car's purchase.
"If you're short, you have to worry about cars coming out this summer and having this installed," says an analyst (normally an awfully skeptical guy) for our hedge fund manager. "And if you're short you have to worry about if they can make their subscription numbers, because if they can, they can make money."
The company has been saying that it needs 4 million subscribers for cash flow to turn positive. With 220 million cars on the road, my XM watchers don't think that's unrealistic. And that's not even with discussion of extending the service to portable radios.
What about competition from
, which is in the early stages of launching a competing service? No big deal, say the bulls. "You have
and you have
," they say. "It depends on which programming you want."
Still, isn't this still just a concept? Perhaps, but "you're up against a company that has a legitimate chance of making it," the hedge fund analyst says. "You want to be short stories that are capped. This isn't a capped story."
What do you think?
Meet and greet:
Join me, Cramer, Kass and a bunch of other fine folk May 2-4 at
"Advanced Disciplines & Strategies for Running Hedge Funds"
conference at the Doral Golf Resort & Spa in Miami. I'll be giving my spin on the world, but when I'm not doing that I'll just be hangin' for two days in my native haunt with not much else to do but get to know you. Seriously, I will have a
of time on my hands to, hopefully, make some new sources! Look forward to seeing you there.
Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback and invites you to send any to
Herb Greenberg. Greenberg also writes a monthly column for Fortune.
Brian Harris and Mark Martinez assisted with the reporting of this column.