After weeks of upward momentum Sirius XM finally released their Q3 2010 numbers today. The company reported good metrics across the board, but in the end,and to the frustration of many investors, the stock closed down for the day. Looking at the numbers many may wonder what went wrong to cause an erosion in share price to an intraday low of the low $1.40's. The answer is Actually quite simple. The quarter was good but not great.
Now I know there will be scores of people out there saying this was the best Q3 in quite some time. and that is very true. However, the company is being measured differently today, and in comparison to Q2 of this year SIRI held the line in many metrics while showing a modest improvement or modest setback in others. To be clear, holding the line in Q3 is a big step, as Q3 is among the weakest quarters for the company. What was likely tempered is some of the big gains that some were anticipating.
The numbers all played out pretty well. The biggest factor going forward is not what happened in Q3, but instead where SIRI set their guidance for 2010. In many ways the guidance seems anemic compared to what we have seen this year. Will Q4 only deliver $120 million in adjusted EBITDA coming off of a Q3 that carried $169 million? Are there really only a couple of hundred thousand subs left this year? Will Q4 revenue simply match Q3? These are the questions people have. These are the items that give some people pause in their excitement.
That being said, what these people are missing is the real story of Sirius XM. What is happening with the company is VERY healthy. Modest gains in metrics each quarter allows the company to grow at a rate that can be managed. The key here is that with hundreds of millions in revenues, modest gains in metrics represent substantial sums of money. Sirius XM can grow a methodical step at a time. The story here is that SIRI clearly demonstrated in Q3 that they are for real in terms of financial metrics. Their guidance, which I feel is conservative, shows more gains to come. As this company matures, gets debt even more manageable, and adjusted their business model, they can turn these little steps into much bigger ones.
During the call Sirius XM CEO Mel Karmazin discussed and added more flavor to Satellite Radio 2.0. As I anticipated, it is more than just technology. It is about technology, content, and additional services. Satellite Radio 2.0 promises to deliver a 25% efficiency on band width. That is huge! Think of it as another 40 channels worth of content. With it only being available on newer hardware, it gives the company yet another tier of programming from which consumers may pay even more money for. This means more hardware sales at the retail level and a renewed energy among existing users. This aspect alone could be huge going through the end of 2011 and the beginning of 2012. The concept also promise more Latino programming, which Karmazin noted was under-served with the current satellite radio line-up.
The bottom line is that while investors may be a bit disappointed with the price action in the stock, the longer term looks much brighter, and carries a lot more potential. Look for analysts to begin raising targets. The performance in this Q3 should be proof enough that valuation is fair, and there is plenty of potential yet to come. In my opinion we will see targets creeping toward $2.00 a share and up in the coming weeks.
Position - Long Sirius XM Radio