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XM vs. Sirius Valuation Pt 2

I wrote last December about the large gap in valuation per subscriber between XM (XMSR) and Sirius (SIRI), two satellite radio providers with stratospheric valuations, but with Sirius selling for 3x more than XM on a per subscriber basis. I proposed a simple hedging trade – short SIRI and go long XMSR. This morning, XM announced a particulally spectacular loss and Director Pierce J. Roberts resigned based on disagreement over the companies direction. His comments are best viewed in his resignation letter filed at the SEC.

Given current course and speed there is, in my view, a significant chance of a crisis on the horizon. Even absent a crisis, I believe that XM will inevitably serve its shareholders poorly without major changes now. It is clear to me that I cannot be part of the solution and I will not be part of the problem.

XMSR traded down steeply this morning, breaking what had been to date a neutral trade. I proposed the hedge on the evening of December 18th. Let’s take a look at where things stand right now before the market opens.


Comapnies making big capital intensive expenditures in technology historically go through a cycle where the initial, starry-eyed investors get washed out. Panama Canal (French Bondholders), Transcon Railroad (US Govt., Bondholders), Undersea Cable (Morse, others), Satellite Telephones (remember Iridium?), a notable exception is the Erie Canal. I’m still a firm believer that before satellite radio is successful as a niche product; it will wash out all of the first round investors. And I still think SIRI has farther to fall than XMSR. SIRI reports earnings tomorrow. I’m going to wait and see what happens, and I’m sticking with the trade.

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Not a recommendation to buy or sell any security. For informational and educational purposes only.


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