As promised from yesterday's post, I am back weighing in with my opinion on the future progress of Sirius Satellite Radio and its likely, subsequent valuation. I start with the premise that a lot of people out there want a service such as being offered by SIRI and XMSR. It really is, in my mind's eye, a question of how many potential consumers exist.
Let's dispense with one of the more overarching questions that must be settled before advancing the argument. Why would people pay to listen to the radio when they presently get it for nothing? The answer rests in precedent. At present, 67% of all households pay for cable when they can get TV reception free. Direct broadcast satellite commands 11% penetration and is growing like a weed. Thus, we'll start with the premise that people will pay a fee if they sense there's value added. The quality provided by satellite radio is undisputed; thus, people will pay $9.95 per month. But how many?
At present there are approximately 200,000,000 vehicles in the U.S. fleet. I am assuming a simple 20% penetration rate to produce a user base of 40,000,000 trucks and autos that will opt for a digital audio satellite radio in their vehicle. This market will unfold in orderly fashion and I am using a five year horizon to reach the 40,000,000 vehicles in use. To further simplify the exercise, let's assume SIRI and XMSR split the market equally. For what it's worth, I think SIRI will prove to be the Alpha Ape with about 26,000,000 of these vehicles as subscribers. These are not winged numbers! For instance, Bear Stearns has 11,300,000 vehicles in use after five years, and growing to 18,000,000 after seven years. But after thirty-five years as an investment advisor, I've learned that Wall Street analysts are highly anal retentive and are usually captive to their legal/compliance departments with concern to forward looking statements. More interestingly, the Yankee Group, a highly respected media consulting group estimates the same number of subscribers as I am; that being 40,000,000 vehicles.
In 2005, the revenues produced by SIRI will be $2,388,000,000 (20,000,000 vehicles x $9.95 x 12 mos). I am assuming a 56% after tax profit margin with all expenses including taxes being in the area of $1,068,000,000. This leaves $1,320,000,000 in income available to shareholders. At this point in time, there should be approximately 66.7 million shares outstanding. This equates to $19.79 in earnings per share in the year 2005.
But let's not forget the market is a discounting mechanism and by the Spring of 2003, three years from now, the market will be pricing the future value of SIRI's future earnings stream of $19.79. What p/e is assigned to a duopoly growing at about 30% per annum -- I would argue at least 50x. This gets our little friend to about $990 per share, three years hence.
Bear in mind, nowhere in my model do I incorporate revenues coming from in-home entertainment, boom boxes, commercial office space, restaurants, private businesses, et al. I also have not included revenues from the sale of receptor units, from advertisements on the talk channels or advertisements monies generated from the music channels. Not advertisements such as XMSR will produce, but soft advertising dollars in the fashion of . . . "and now Pepsi-Cola is proud to bring you the next hour of music from Broadway".
Ladies and Gentlemen, we are in the stable the night Secretariat was foaled, and we'll all own a piece of this magnificent beast. Stay with "the Dog Star". The ride will be long and exhilarating!
The fox knows many things. But the hedgehog knows one big thing. |
