Trading at around $9 per share, XM Satellite Radio is well down from the price it once enjoyed in the 40s, but Goldman Sachs analyst Mark Wienkes thinks it’s still too expensive. After looking at XM’s Q2 numbers, Wienkes has lowered his subscriber outlook and dropped his six-month price target to five bucks from his previous $6.50.
“While we believe both XM and Sirius could continue to function, merged or unmerged, we continue to recommend selling shares into merger-related strength given what we perceive as a fundamental disconnect between the approximately $9+ billion in industry enterprise value, implying approximately $6.5 billion of equity market cap, versus the deteriorating cash flow profile, even giving credit for a merger,” Wienkes told clients.
Just as AM, FM and TV broadcasters are being impacted by soft advertising from automakers, the Goldman Sachs analyst sees XM being impacted by lower auto sales. “Specifically, we believe the ultimate universe for satellite radio is increasingly impaired by a both lowered OEM production levels and an array of lower cost/higher value alternatives that may prevent the medium from gaining the critical mass necessary to drive attractive risk adjusted returns to shareholders,” Wienkes said.
The analyst said he has doubts about the long-term profitability of satellite radio. He figures that 70% of XM’s gross subscriber adds in Q2 were, in effect, replacements for churning subscribers. “In our view, with the rapid increase in adoption of competing streaming media technologies and a falling demand amongst the under 44-year-old demographics, we have to wonder if, after nearly 10 years since inception, satellite radio has missed its opportunity as a mass market product,” Wienkes wrote.