Now at Liberty, Sirius Is Dogged by Questions

NEW YORK (TheStreet) -- Investors are rejoicing that Liberty Media (LMCA) is no longer interested in buying the remaining portions of Sirius XM (SIRI) it doesn't already own. Sirius closed Friday at $3.44, up over 2% from Thursday's close of $3.37 although down 1.4% for the year to date.

Investors, including consumer advocate and one-time presidential candidate Ralph Nader, believed they were being lowballed on the price offered by Chairman John Malone, whose Liberty Media has a 53% stake in the satellite radio company. Malone offered $3.68 a share in January to buy out the rest of the company.

With Liberty out of the picture for now, Sirius didn't waste any time taking control of the story. The company said it's resuming its $2 billion share repurchase program, which was put on hold pending a resolution to Liberty's offer. The company also reaffirmed its guidance for 2014.

Aside from projecting 1.25 million in net subscriber additions of 1.25 million, management held firm to its revenue target of over $4 billion. The key metrics in the equations, however, is Sirius projected free cash flow of $1.1 billion. The strong cash flow, in my opinion, was the main driver of Liberty's bid. What's more, it is this cash flow that will fuel Sirius' ability to resume its share buyback program.

Meanwhile, John Malone has shifted gears and is looking to spin off Liberty into dual tracking stocks. Reports suggest a new Liberty Broadband tracker will include various entities, including prior positions in Time Warner Cable (TWC) and Charter Communication (CHTR), in which it owns roughly a 25% stake.

It's not yet clear what Liberty's future intentions will mean for Sirius. But the company hasn't completely closed the door on revisiting the idea of full ownership. What is clear, however, is that investors and analysts are pleased with this outcome.

One in particular is Jessica Reif Cohen, analyst at Bank of America. On Friday, Cohen issued a buy rating on the stock and placed a price target of $5. From Friday's close of $3.44, this represents a 45% premium, which makes Sirius significantly undervalued.

But Cohen had her reasons. Among others, she cited Sirius' satellite platform and the company's exclusive content. Cohen claims that Sirius' satellite platform has a competitive advantage versus any other audio-only offering.

This may be true, but it certainly hasn't stopped IP platforms such as Pandora (P) from entering and dominating the market. As it stands, Pandora is the industry leader with over 7.5% market share in the U.S. radio audience.

Pandora boasts more than 16% year-over-year growth in listening hours, with subscription revenue surging well over 140% year over year. Granted, Pandora is still a relative startup in its subscription platform. After all, the company's business is based on advertising revenue. It's still hard to deny that Pandora is an exceptional growth story with no meaningful signs of slowing down.

So it's hard to completely agree with Cohen's "barrier to entry" argument for Sirius. For that matter, both Apple (AAPL) and Google (GOOG) are now Sirius threats. In addition, last week we learned that Amazon (AMZN) also has musical ambitions of its own.

So while Sirius has been a strong performer in recent years, the company has never had to face these four formidable rivals at the same time. Each of them wants to control the automobile dashboard.

In addition, at $3.44 per share and a price-to-earnings ratio of 57, Sirius stock is far from cheap. Even if Cohen is correct, there is tons of future growth that is being priced into these shares.

While reaffirming guidance, Sirius said it expects revenue to be at/over $4 billion. Sirius generated 2013 revenue of $3.8 billion. This suggests just 5% year-over-year revenue growth. That's not enough growth for the projected value -- not when the subscriber growth rate is decelerating.

At the time of publication, the author was long AAPL.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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