I find it amazing that even after being invested in an equity for a good length of time that there are several misconceptions about SiriusXM (NASDAQ:SIRI) that seem to be made again and agin. Some of them are innocent enough, but others could dramatically change ones stance on valuation, price action, or worse even your entire reason for investing or remaining invested.
- Market Cap – Pretty much any news source out there will list the market cap of SiriusXM without consideration to the very real preferred stake that Liberty Media has. By example, the popular Yahoo Finance site lists Sirius XM’s Market Cap as $9.54 billion. If you consider the Liberty stake, which is prudent, the market cap is $16.46 billion. This is a substantial difference and impacts many other things investors tend to watch such as Enterprise Value.
- Shares Outstanding – If you are invested in this company you will want to use the fully diluted share count for a number of reasons. Currently that count is at just over 6.5 billion, while the basic 3.77 billion. As you can imagine, this can create a stark difference in how a company is measured. The company uses the fully diluted count in their metrics, so why do some investors insist on using the basic count? In the most recent quarter the company reported an EPS of $0.48. That was based on the fully diluted share count. Had they used the basic cont the EPS would have been $0.83!
- Shares Short – Yes, there are over 300 million shares short on SiriusXM. What many investors fail to realize is that the natural short position on Sirius XM is quite substantial. The 7% convetible notes potentially represent 293 million shares. When an institution takes on these convertible notes they typically short the stock. The simple reason for this is that it is the prudent thing to do. Consider this. An institution loans SiriusXM $550 million. The company agrees to pay 7% interest, but these notes can be converted to stock at a rate of 533.33 shares per $1,000 invested. The conversion price is $1.87. At the time the notes were offered the stock was trading at $1.50. Why would that institution short? To remove risk. The institution is interested in the interest, not necessarily the equity. By shorting, they collect money now and are essentially removed from the short position hurting them no matter what happens. If the equity goes down they win because when they eventually close the position they do so with shares from the conversion. If the equity goes above $1.87 they win because they can again use the shares from the conversion to return the shorted shares. Essentially, a massive portion of the short interest in SIRI is due to the potential of 293,000,000 shares that tie to these 7% notes. This kind of throws a new dynamic and thought process onto the concept of a short squeeze when a substantial chunks of the short market is immune from price fluctuation.
- Institutional Ownership – Sirius XM institutional ownership is actually much higher than many think and substantially lower than others think. How is this possible? Well, the simple answer is that there are two mistakes that are common when looking at institutional ownership
- NASDAQ used 3.83 billion shares in calculating institutional ownership at 52%. NASDAQ reports that institutions own 1,992,124,802 shares. This obviously neglects to account for the Liberty stake, which is 2.56 billion shares plus an additional 493.6 million shares. The Liberty stake equates to 3,080,582,453 (excluding the converts they have). If you consider pure institutional ownership (excluding Liberty) vs. the fully diluted share count, you would get institutional ownership at 30.6%. If you consider Liberty like an institution, then institutional ownership would be at 78%.
- The second thing I see people do is a simple matter of thinking through on their math. I see some say that Institutions own 52% and Liberty owns 48%, so there must be a minute amount of retail shares being traded and me as a retail holder am in an awesome position. While 52 and 48 add up to 100, it is not how this works. The Institutional ownership at 52% is based on a different share count than the Liberty stake at 48%.
These very common mistakes can present havoc to investors. I have seen articles base valuation multiples on the wrong data and arrive at the conclusion that on an EV/ EBITDA basis Sirius is trading at way too low of a multiple. While it may sound great, the expectations may be way off the mark. An article that tells you SIRI should be trading at a multiple of 20, but is only trading at 12 and therefor has a huge upside potential would be much different if the correct metrics were used and with the realization that SIRI is trading already at a multiple of 17.5. Certainly upside would still exist, but it is not as exciting as it was when someone thought the current multiple was 12.
The purpose here is to give you the reader some insight into how to look at this company and perhaps arm you better as you conduct your research. Happy Trading