SIRIUS XM Radio Inc. (SIRI) is selling off for a second day after earnings. 24/7 Wall St. has spent less effort covering Sirius of late because its valuations were becoming stretched. We have seen a downgrade by Goldman Sachs and by Evercore earlier on Friday after the company gave guidance for 2014 and said that it would begin to raise prices. Sirius XM shares may recover from a lower base, but it sure seems that the bull run in Sirius XM shares is no longer just going to a straight gradual climb as investors may be used to.
When Sirius raised prices before it did not cause major defections. Most subscribers will not even notice the same cost as two or three coffee drinks per year. Sirius added 513,000 net subscribers in the third quarter to end with 25.6 million subscribers. Earnings of $0.01 per share or $62.9 million were also a bit under expectations. The company's forecast of $4 billion in 2014 revenue was a bit light compared to the consensus estimates. Perhaps management is just merely setting a low bar.
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The long and short of the matter is that Sirius XM's valuations have simply became stretched for us to remain comfortable with at the higher prices too far above $4.00 on the stock price. Sirius is still what we consider to effectively be a controlled entity under John Malone's Liberty Media Corp. (LMCA).
The past rally took Sirius XM under Mel Karmazin up to $1, then above $2, and then above $3 before finally rising above $4 just recently. Shares kept rallying even after Karmazin was forced out. Efforts to refinance debt at lower rates and to push out the maturity schedule have been incredibly beneficial to the company.
We are not as concerned about the Pandora Media Inc. (NYSE: P) competitive threat as some investors might be. That being said, Pandora is positioning itself to be a better competitor to Sirius XM as it signs more car bundling deals. That being said, we are also still not a full endorser of the Pandora business model as of yet. The good news is that Wall Street is becoming more comfortable that its cost structure does not rise exactly as much as the revenue structure.
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A long time ago (during the meltdown) we suggested to readers that they could buy Sirius XM shares when it was well under $0.25 per share. The message was not just for a trade, but one for a very long-term hold. It was a suggestion to ask for physical delivery of those shares so that you could not easily sell them, and then to lock them up in a drawer. Maybe not all of those shares have to be sold, but this is a time where the upside has gone well above what we would have considered a very fair valuation in a normal market. Locking in at least a good portion of long-term gains here at this point would only be prudent.
Even after the pullback of 5% on Friday to $3.70, Sirius shares have roughly a $23 billion market cap. Liberty media has a $18 billion market cap and Pandora has a $4.7 billion market cap.
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We have never written about the end of the great run in Sirius XM. This might not even be that end if the bull market keeps charging. That being said, this is a signal that shareholders who are sitting on big long-term gains here have made the easy money and then some and then some more. Taking a good portion of the profits never hurt anyone in an instance like this.