Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Sirius XM Shows Us How to Create Float

There is at least one company that has figured out how to make money in the seemingly hopeless world of digital media. It is Sirius XM Holdings (NASDAQ: SIRI)—yes, the outfit that offers the satellite radio service in your car.

Unlike some of its competitors, Sirius XM has actually been posting some impressive financial numbers lately. On March 31 Sirius posted a year to year revenue growth figure of 8.35%, a net income of $504.94 million, a profit margin of 9.78% and return on equity of 33.3%, according to our friends at Ycharts. It looks as if this stock is finally living up to its reputation as a value investment—on June 22, 2015, Sirius was trading at $3.875 a share, making it an interesting bargain.

Over the past year Sirius has been demonstrating some impressive revenue growth as well. In March 2014 Sirius reported a TTM revenue of $3.899 billion; on March 31, 2015, that number had risen to $4.26 billion. That translated into an increase of $361 million in a year, which is extremely impressive for a company with a market cap of $21.21 billion and an enterprise value of $25.81 billion.

Sirius Leaves Pandora in the Dust

This is made all the more impressive when you take a look at Sirius’s closest direct competitor: Pandora Media (NYSE: P). Unlike Sirius, Pandora seems to know how to do one thing: lose money.

You can find many classic investment books at the Book and Comic Picker eBay Store.
You can find many classic investment books at the Book and Comic Picker eBay Store.

On March 31, 2015, Pandora reported the following numbers: a net income of -$49.73 million, a profit margin of -20.91% and a return on equity of -9.16%. Those figures are particularly sorry because Pandora has demonstrated some impressive revenue growth recently.

It reported a year to year revenue growth rate of 18.76% and an increase in revenue of $255.9 million over the past year. Pandora’s revenue is actually approaching $1 billion for the first time; it reported a TTM revenue figure of $701.35 million in March 2014 that grew to $957.25 million in March 2015. That’s impressive for a company with a market capitalization of $3.529 billion and an enterprise value of $3.198 billion.

Pandora and Sirius Give Us Proof of Mr. Market’s Insanity

Now for the insane part of our little story, folks—Pandora was trading at $16.69 a share on June 22, 2015, which seems overvalued to me. Once again Mr. Market is showing us a really wonderful opportunity here: A company with steadily growing revenues and an enterprise value of $25.81 billion is trading at less than $4 a share. If that is not a value, I do not know what is.

Pandora, on the other hand, is trading at close to $16.69 a share, and it is not even making money. Not even fast-growing revenue can translate into income at the digital music service.

It is obvious here that Mr. Market likes Pandora and hates Sirius. One will have to ask why, and the obvious answer is that Mr. Market seems to like Pandora and dislike Sirius for the same reason that the public does: the company’s business plans.

Pandora Buys Likability

Pandora has effectively been buying likability by giving a fairly expensive product that it pays for—music—away for free. As I pointed out earlier, The New York Times reported that Pandora paid $446 million in music royalties in 2014.

That means about half of Pandora’s revenues, including all the revenue increases, went straight out the window. It is no wonder this company cannot make money; it has failed to monetize its customers, but it still keeps giving an expensive product away for free and engaging in costly litigation.

This business model does buy likability; most people love music, and they love the idea of listening to it for free. That’s why Pandora had 81.5 million active listeners and 250 million registered users in 2014, according to our friends at Around 175 million of those are in the U.S., and they use Pandora a lot; the average fan listens to the service for 25 minutes a day. It is also why Pandora received an astounding 45 million likes from its users.


The problem from a value investing standpoint is that those users are not paying for the service. They’re freeloading and costing Pandora a lot of money in the process.

How Sirius Makes Money the Old-Fashioned Way

Naturally, a number of people will want to know why Sirius is so profitable while Pandora is bleeding red ink. The answer can be summed up in one word: subscriptions.

In contrast to Pandora, Sirius XM only has around 25 million subscribers, but it makes money off of each of them by charging a subscription. The cheapest Sirius subscription, Mostly Music, costs $9.99 a month, which means the company would make around $24.975 million each month, or $299.70 million on subscriptions alone, if all its customers bought its cheapest offering.

Actually, Sirius probably generates a lot more float because it also sells Sirius Select, a 140-plus channel lineup for $14.99 a month and All Access for $18.99 a month. All Access provides listeners with Internet listening and 150 channels. To add icing to the cake, Sirius also lets Mostly Music subscribers listen over an app if they shell out $4 a month.

In other words, Sirius XM is making money and generating float the old-fashioned way—by charging customers for its service. That obviously is not as popular as Pandora’s giveaway, but it at least generates some revenue. Sirius can at least pay the cost of music royalties with its subscriptions, which means any advertising it sells is icing on the cake.

What’s more interesting is that Sirius offers its fans a lot of bang for their buck. The current Select offerings include comedy channels, audio of every NFL game and audio of every NASCAR stock car race. All Access features every NFL game, every NASCAR race, the PGA Tour and Major League Baseball, NBA and NHL games. To draw in more subscribers, All Access is also the exclusive home of one of America’s most popular radio personalities, Howard Stern.


Sirius has adopted another old-fashioned strategy of offering a lot of quality programming for a really low price. My take on the matter is that Sirius is generating a lot of float, and it is poised for a lot of growth in the near future.

The subscriptions give it money to buy more exclusive programming, which attracts more listeners and subscribers. Sirius is a true value with a bright future; Pandora, on the other hand, is on the fast track to insolvency in the near future if it cannot figure out how to make money and fast.

One has to wonder when John Malone (the owner of Sirius XM and Liberty Media) will buy up the remains of Pandora and fold it into Sirius XM Holdings. I imagine it will happen because Pandora is going to be real cheap real soon if current trends continue.