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XM Satellite: Very Little Fundamental Risks Left


Now is time to shift the focus away from attracting customers at any cost, and to ramp cash flow and profitability.


I have had a love-hate schizzo relationship with XM Satellite Radio (XMSR) for quite a while now. I've been long the stock for a long time, but since the beginning of the year I've actually been net-short through options more often than not. (See here also). Earlier this month I abandoned the dark side and shifted to simple downside protection thinking that the pounding was discounting enough bad vibes. Not so apparently. Yesterday XMSR reduced its expected subscribers number for the full year and the stock got clocked. This morning the "CNBC Penguins" were out in force taking down their ratings, and pushing XMSR to yet a new 52-wk low.

I am reciting this sad sad story because lost amid the the doom and gloom headlines, most have ignored that the lower subscriber adds will be the result of lower spending to acquire retail customers. I may be totally hallucinating, but IMHO the latter is the really important news item.

Through my suddenly rosy lenses, I see XMSR's management thinking that they have reached a sufficient critical mass of subscribers that survival is no longer an issue. Their business is here to stay. Now it's time to shift the focus away from attracting customers at any cost, and to ramp cash flow and profitability. WIth the "critical survival mass" under its belt, XMSR can finally afford to let the natural forces of a duopoly guide the customers to it, rather than it having to round them up with expensive incentives.

As XMSR morphs from a concept growth story into a profit driven company the turnover in the shareholder base will make things bumpy. Those who traded off of flashy headlines from a really cool company have or are jumping ship, while those who are looking for an emerging earnings growth story will need to be convinced that there is a there there.

For my money I'm still concerned about potential self-inflicted wounds (accounting / option screw ups, bonehead moves by management, etc. etc.), but I see very little "business fundamental risks" left in the stock. Was today's high-volume reversal close the beginning of something good?

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Position in XMSR
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