Back in the days when Martha Stewart cutting cabbage brought thoughts of summer picnics not insider trading scandals, the downtown investment world was in love with the idea of satellite radio. Today,
each new corporate scandal makes analysts more cautious about new companies, new products and new technology - particularly since some are still shell-shocked from the dot-bomb. At the same time,
analysts are under increasing scrutiny to speak the truth on the companies they follow. All this combines to create a new macro economic picture for satellite radio.
In a tough break for XM and
Sirius, the markets have been increasingly bear-like when it comes to telecom stocks. While most stocks were rising Friday, satellite radio stocks were moving the other direction. Merrill Lynch cut
its short-term rating on XM from "buy" to "neutral" and Sirius to "sell" from neutral. Sirius plunged 16.4% on Friday to $3.01 and XM was off 7.6% at $5.75.
From Internet companies going belly-up
to the troubles with telecom giant Worldcom, "There is little appetite for risk," said Merrill Lynch VP Marc Nabi. Little wonder then that in the second quarter of this year, XM's stock lost 47% of
its value as it ended the quarter $6.40 lower than it started. Sirius didn't fare much better, as it dropped 29%, or $1.55, from April to June. In early July, a pair of research reports from Merrill
Lynch sent the stock price of both Sirius Satellite Radio and XM Satellite Radio tumbling. In his report, Nabi outlined why he sees trouble on the immediate horizon for XM and Sirius, and that gave
already nervous investors a reason to jump.
As a business, the investment community still believes satellite radio's long-term prospects are strong. What has it worried is both firms' financial
picture in the next few years. XM Radio will need to raise more money before the first quarter of next year, while Sirius will need to find additional capital in mid-2003. That could be difficult said
Nabi, because Sirius is already carrying $587 million in debt.
Something else that has investors worried is the satellite radio operators' reliance on car manufacturers. At the moment, Sirius and
XM need car markers much more than they need the satellite radio companies. At some point, when there is sufficient consumer demand for the product, that will change - but in the meantime the car
companies are in the drivers seat. That's one place where XM is thought to have an advantage, because General Motors and Honda are among its biggest investors. GM has even announced it will offer XM
in 25 models starting in September.
It's important to also consider that Nabi did something that in the pre-Enron days happened very rarely on Wall Street: He suggested investors actually sell a
stock. Specifically, Nabi says Sirius may be forced to tap the equity market to raise the several hundred million dollars it needs. That would result in more dilution, thereby leaving anyone holding a
share of Sirius with a smaller piece of the pie. Nabi's solution? Sell.
Long-term, the picture for both companies is much brighter. XM Radio added 60,000 subscribers in the second quarter, bringing
its base to 136,000. Sirius' nationwide launch was completed a month early without a hitch. "We are growing increasingly comfortable with satellite radio as a consumer service and as a business
model," said Nabi. What will help Wall Street grow more confident with the technology, and these two companies, is larger subscriber numbers, the debut of its second generation of chipset technology,
more retail outlets offering their service - and most importantly, a hint that profitability, while still a long way away, will be worth the wait.