Monday, May 01, 2006

Market Capitalization

May 1, 2006

In satellite radio Market Cap is often a hot topic for discussion. Market Capitalization is defined by Investorsdictionary.com as “The total value of a company’s outstanding shares.”

To find the market cap of a company multiply the market price of the stock by the number of shares outstanding.

Market Cap, as simple as it is to determine, sparks a lot of debate amongst those that follow SDARS. Currently Sirius satellite Radio has a higher Market cap than rival XM Satellite Radio. There are many who feel that this should not be the case. We often see statements that XM has more subscribers, and therefore should have a higher Market Cap. This is a simplistic argument that does not get down to more core issues.


This is one of the two components that determine Market Cap. The trading price of an equity is affected by many things. Position of the company among their competitors, cash position of a company, debt load of a company, cash flow of a company, news, and market perception all have roles in the price per share.

In the past, Sirius and XM were measured by subscribers and the deals they have been able to strike. Everyone knew that these companies were very young, and losses were expected. There has now been a shift to looking at more traditional metrics and cash flow as the yardstick for these companies. This is where Cash Flow Break Even becomes important.

Sirius and XM took differing paths over the past few years. Sirius went forward with a strategy of paying down most of their debt via dilution. XM tried to avoid dilution. The result was that the outstanding share count of Sirius and XM has a huge spread. Sirius has a lot more outstanding shares, and thus a much lower price per share. Yes, the Sirius method had an impact on shareholders at that time, but because the dilution is behind them, there is no impact to current shareholders (beyond what has already happened). Stock dilution de-values the price per share.

Today however, Sirius is on the cusp of reaching Cash Flow Break Even. This means that Sirius will bring in more cash than they outlay. In other words, they are getting close to becoming profitable. Being profitable does have a value to investors, and that value can translate into the price per share, and thus help the Market Cap of a company.

Cash Flow is a component that many investors look at, and rightfully so. Having positive cash flow greatly affects the path of a company, and opens doors that might not otherwise be available. The fact that it appears that Sirius is likely going to have a better cash flow position going forward could be a major factor in why Sirius, with fewer subscribers can have a higher Market Cap.


Because this aspect of SDARS is what many people look at we will cover it. In the simplest terms, people are wondering why Sirius will be at CFBE with 6,000,000 subscribers, and XM with that 6,000,000 subscribers already is still over a year away from CFBE.

This issue goes straight back to cash outflow. Sirius used dilution to pay down debt and XM did not. Major deals are also structured differently A big factor for XM revolves around their deal with General Motors.XM’s payments to GM are substantial, and still will be even with the recent re-financing. The result is that XM’s payments on debt, and the structure of their deals are substantial enough that they outlay of cash requires more subscribers to cover. In Sirius’ case, shares of stock were used in many of the deals, and thus the cash outlay is less. This means that it takes Sirius less of a subscriber base to cover the expenses of the company.

SSG is not stating that one method was wrong and the other was correct. Both paths had/have their positive and negative aspects. The important thing now is to understand the paths, and understand WHY the Market Cap for each equity is where it is.

The link to this write up is http://tinyurl.com/mxgaq

5/01/2006 12:26:00 PM

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