Sirius XM Investors: Stop Chasing the Carrot and Buy Pandora

NEW YORK ( TheStreet) -- Insanity is described as doing the same things over and over again and expecting a different result. Perhaps its merely stupidity.

Whatever the case, there are investors of Sirius XM ( SIRI) pathetically incapable of realizing that the carrot they have been chasing over the past three years is really out of reach. It has become more of a figment of their imagination. They have yet to realize that they have all been a part of someone's poor attempt at humor by being convinced that they can acquire wealth simply by investing in the idea of satellite radio.

On the heels of Pandora ( P) announcing better-than-expected earnings, it was once again time to reassess the long-term viability of Sirius XM -- one that will pin its satellite delivery mechanism over the simpler and more scalable IP format that is used by Pandora,, iHeartRadio and a host of other lesser known companies.

As easily I as I have named these alternatives to satellite radio, remarkably Sirius investors are quick to point out that the company is a monopoly ad has no competition. But they don't realize what an indictment this would be on the company if it were true.

As great as it is to constantly proclaim that Sirius has no competition, astute investors can easily study the company's recent performances, its balance sheet and its income statements and ask some very important questions. For instance, why has the company demonstrated such a struggle to secure 50% of the auto market if it has the market all to itself? Essentially, with no competition, not only has Sirius failed to lock up subscribers at an impressive rate, but it loses subscribers to cancellations at a faster rate than it secures them -- at a ratio of almost 7 to 2, and that's being conservative.

For 2011, the company reported 7 million cancellations, while growing subscribers by only 1.7 million. So does that sound like an investment based on anything more than hope -- or as I like to call it, chasing the carrot?


What this should tell investors is that not only is the model not working, but they should bail and find one that is.

So far the one that is working appears to be that of Pandora. Why would anyone in their right mind want to pay for premium radio when there are free alternatives out there -- particularly one that continues to trend successfully?

What continues to be disappointing is that these investors are steadfast on the hamster wheel and expecting that one day the company's fortunes will make a turn for the better. But they are holding firm to these hopes and dreams as Wall Street is making it known that it has other ideas -- most of which are firmly implanted in the IP format.

What continues to hurt Sirius is the fact that the company has to pay a subsidy to the auto makers just for the chance to acquire a subscriber. This is a significant impediment on the company's long-term ability to return value to shareholders -- at least organically. And the fact that this investment continues to yields disappointing returns as evident by the annual cancellations and its 44% conversion rate is quite unimpressive to say the least.

There is no other successful model that operates this way and lives to talk about it.

The company understands that it is spending too much money and not growing enough to justify its capex. I have always considered this to be the reason why it focuses more on its free-cash-flow and less on its earnings growth -- or the metric that should really matter to investors.

Interestingly, this is a metric that Pandora has shown to care about considerably. On the other hand, Sirius investors were once quick to point out that Pandora would never make any money. Bottom Line

There is no doubt that Sirius as it currently stands has a very limited window of success. Its saving grace would be to be taken over by Liberty Media ( LMCA) -- a company that has the expertise and the track record to make it a success.

The question is, what will this all mean for current Sirius shareholders? Right now the situation remains too blurry to say with any degree of certainty how things will unfold. However, one thing that I know for certain is that Liberty will find every opportunity to exploit the hamster wheel and the carrot that drives this constant insanity . . . excuse me, stupidity.

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