Sirius XM is Facing a Perception Problem... Though That's Enough (AAPL, SIRI, P)

If headlines are any indication, then Sirius XM Holdings Inc. (NASDAQ:SIRI) is one again supposed to be one of the few "must have" investments heading into 2014. If the chart of SIRI is any indication though (and it is), then the SIRI party is over. Since - as they say - money talks, the smart move here may be to listen to what the chart of the satellite radio service is telling you.... that Pandora Media Inc. (NYSE:P), iTunes from Apple Inc. (NASDAQ:AAPL), Spotify, and perhaps a handful of other alternative audio entertainment sources are finally getting enough evident traction that Sirius shareholders are spooked. The evidence that the likes of Apple and Pandora are actually stealing business SIRI would normally win is shaky, at best, mind you. Indeed, the subscriber growth trend for Sirius XM remains impressive, and should realistically continue to grow at a steady clip for years. The perception of SIRI relative to P or AAPL, though, is damaged, and changing investors' perception is a heck of a lot tougher than winning new customers is.

The alarming red flag here is the fact that SIRI shares have fallen under their 200-day moving average line (green) ... for the first time since mid-2012. Broadly speaking, when a stock does this, it's a clue that the long-term undertow is already well into a bearish groove. Sirius XM shares may be destined to move significantly lower before finding a floor from which to push off of and rebound.

Exacerbating the problem - and perhaps IS the problem - is that shares doubled in value in a little over a year. While the company has done reasonably well during that time, in simplest terms, the market got ahead of itself. SIRI is still priced at 47 times its trailing income, and 29 times its forward-looking income. That would be palatable if earnings were growing at a clip of, say 40%. They're not though. 2013's operating income barely budged, and while 2014's projected income of $0.12 per share is stronger than the $0.07 per share the company is on pace to earn this year, it's worth noting that the company's has missed operating earnings estimates in three of the past five quarters. And, annual operating income growth hasn't actually grown since 2011 (assuming the company does indeed post a full-year profit of $0.07 per share for 2013... which is likely) despite continued growth in the subscriber base.

And that's where the existence of Apple... well, iTunes, Spotify, and Pandora start to come into play against Sirius XM.

It's an admittedly-fuzzy comparison. Satellite radio has been a success since its debut, and SIRI now has 25.6 million pretty loyal subscribers. Most of them are in-car users though, where Pandora and iTunes couldn't (nor needed to) compete. On the flipside, satellite radio receivers aren't particularly mobile, where as smartphones are. And, with web-enabled phones now being the norm (as is broadband if a computer is used to listen to digital transmissions rather than airwave-signals), Sirius hasn't been able to compete in that space.

The location-dependent lines have been blurred, however, and though Sirius XM is still adding to its paying customer base, it appears to be increasingly difficult to acquire those customers who are increasingly attracted to the likes of Pandora, Spotify, or iTunes, from Apple. Specifically, margins slumped last quarter - to 6.5% - down from the norm of around 13% the company had grown accustomed to once it swung to a profit in 2011. And, margins were down despite record revenue last quarter. No, one quarter does not make a trend, but all big trends start with that first small step.

Meanwhile, Pandora is growing its revenue like crazy, from $67 million in the third quarter of 2011 to $101 million in the third quarter of 2012 to a record $157 million in the third quarter of this year. It's still only a small drop in the bucket relative to the near-$1 billion that SIRI puts on its top line every quarter, and there's not a lot of clarity regarding how much of Pandora's growth is at Sirius XM's expense. It's not unreasonable to assume at least some of it is though, and more than that, it's evidence that newcomers can make a dent as the lines between car-only satellite-radio and home-only-PC-radio are wiped away by the advent of the web-enabled smartphone... an arena that Apple clearly dominates, at least in terms of unit sales. iTunes is not yet a major direct threat there, but considering the iTunes division at Apple did $4 billion in sales last quarter alone, it's something that should be on the minds of Sirius XM's chiefs, as mobile web becomes the norm. It seems to be on investors' minds anyway; SIRI shares have fallen 15% since their late-October peak.

Truth be told, it's way too soon to assume the worst for Sirius. It's more than proven it knows how to win business, even at the expense of margins. But, that's manageable. The company's survival may have little benefit on the price of the stock though, which is entirely set by the market's bid/ask auction process. If the investors behind those bids and asks are worried that SIRI is facing a rising hurdle, then it WILL continue to apply pressure on the stock. And, with shares having fallen under the 200-day line, it's tough to argue the market feels good about the company. More than that, now that the damage has been done, SIRI may need to keep falling before finding a good floor. A revisit to the $3.00 mark may be in the cards before the market sees the risk-and-reward balance being restored now that Sirius is facing not new, but newly-palpable, threats.

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