A friend approached us with a potential stock pick this afternoon: Sirius XM (SIRI) on the theory that it had gone so absurdly low ($0.20) that it couldn’t go any lower and would probably soon go to $0.30, resulting in a 50% gain. We suggested our friend instead hoard his hard-earned cash.
Could Sirius go to $0.30? Of course. Could it also go to zero? Yes.
Mel Karmazin’s company currently has an equity market capitalisation (value of the stock) of $650 million. It also $360 million of cash and $3.3 billion of debt, so its “enterprise value”–the implied value of the business itself–is about $3.7 billion. The only thing that has to happen for Sirius (SIRI) stock to go to zero is for the market to conclude that the company is worth less than $3 billion. This would wipe out the company’s stock value, leaving the company in the hands of the debt-holders.
Why might the market soon conclude that Sirius is worth less than $3 billion? Because it’s running out of cash. In the first 9 months of this year, Sirius had negative free cash flow (cash from operations – capex) of $300 million. $360 million of cash won’t last long at that burn rate.
Sirius’s stock is now low enough that it will be hard to raise capital by selling stock, and we can’t imagine who would be willing to lend the company money right now. That means the company’s cash cushion is likely to get dangerously low, perhaps forcing Sirius into a highly dilutive equity deal that will put additional pressure on the stock. So it’s not hard to see how the stock could go to zero (or close to it).
See Also: Sirius Hits $0.20
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