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The Tech Sector “Anomaly” That Could Double Your Money By Spring

12 | By Michael A. Robinson

I spend a lot of my time looking for “anomalies” in the tech market because they can lead to massive profit opportunities.

And there’s one I see right now.

It involves a new market that’s worth $970 million – even though it’s still in its infancy. Of course, there are a number of players in this market. But it’s the two top leaders I want to talk to you about today.

You see, one has lousy fundamentals – with stunning cash losses that continue to mount. The other is cash-rich with a rapidly growing subscriber base.

Yet Wall Street adores the first one (the one with the lousy fundamentals) – and hates the second which is exactly the opposite of how you would think it should be.

Today, I’m going to tell you all about this exciting new market and why you should consider making a play in it right away.

And then I’m going to tell you which of these top leaders you can ride for a double by Spring.

The “Internet Radio” Wars

The sector I’m talking about is the Internet Radio market.
It’s an explosive new market that I follow with great interest not just because of the outstanding investing potential (analysts project sales to grow to $1.31 billion by 2016) but also for purely personal reasons.

You see, I’m a former musician – a guitar player who had my own rock band for a dozen years. I don’t play much anymore… but, of course, I’m still a huge music buff.

And I’ve followed the growth of Internet Radio as well as digital music distribution since the time it dawned in the late 1990s. Indeed, as a former musician I quickly grasped just how big a role this new format would be through online music streaming.

So, you can imagine how excited I was when I first heard about Pandora Media, Inc. (NYSE:P). The Web-based service represents some truly great technology…

It’s based on something called the Music Genome Project, and the idea here is simple in its elegance — every song ever recorded has very distinct traits that form its “DNA”

The Music Genome software behind Pandora analyzes 400 musical attributes. These cover everything from the type of melody, harmony and rhythm to musical form, composition and, of course, lyrics.

With Pandora, you can launch what amounts to your own Internet music channel with just one song or artist. Pandora thinks of this as a “seed” that automatically programs the station for you.

So, you end up hearing lots of your favorites while discovering dozens of new artists along the way.

Now, I admit: I listen to Pandora daily. But as much as I love and use the technology, I can’t in good conscience recommend the stock.

By all means listen to Pandora on your iPad all day long but when it comes to investing your hard earned money, Pandora is the Wall Street “darling” you want to run away from as quickly as possible.

The problem with Pandora is simple. The company is growing like a weed – but costs are rising much faster – and the losses continue to mount.

Take a look at its most recent quarter. Pandora’s sales grew 50% from the year-ago period to $181.6 million with mobile ad revenue up 58% to roughly $105 million.

But higher costs across the board resulted in a net loss of $1.7 million! (Compare that to a year-ago profit of $2 million.)

Even worse, for the first nine months of its Fiscal 2014, losses stand at $38 million — a stunning 61% rise from its nine-month losses in the previous fiscal year.

Yet, astoundingly, with Wall Street’s help, the stock is up some 250% in 2013.

Since April, six analysts have initiated positive coverage of Pandora. While it’s true one analyst recently downgraded it to hold… two more have upgraded the stock to a buy.

The fact is, if you simply follow the “noise” generated around this company you’d be convinced it was a no-brainer investment.

But if you ask me, Pandora fits squarely as an example of my Tech Wealth Rule # 2: Separate The Signals From The Noise.

My rule clearly states: If you really want to get wealthy from technology stocks, you need to think for yourself.

And, I believe that based on Pandora’s poor financial performance, Wall Street has this one all wrong. Quite simply, the stock has run too far too fast and is poised for a decline.

That’s why I think investors would do better to consider the other company in this battle for supremacy in the quickly expanding Internet Radio Market.

I’m talking about Sirius XM Holdings Inc. (NasdaqGS:SIRI).

What I like best about Sirius is that they are a cash-rich company with good profit margins priced as though it were still a deeply troubled firm.

It all goes back to 2009 when Sirius XM, the product of a satellite radio merger, was on the verge of filing for bankruptcy. The stock traded at just $0.05 a share.

Cable TV mogul John Malone stepped in and gave the firm a $400 million loan. Malone’s company, Liberty Media, today owns a controlling interest in what has since become an excellent business.

Indeed, Sirius XM now has one of the nation’s best media subscriber bases. It brings in annual sales of nearly $4 billion from 25.6 million paying customers, making it the global leader in audio entertainment.

Let’s put that in a broader context.

You, Sirius now has what amounts to a monopoly on satellite radio. It is brimming with more than 200 channels of content for every conceivable genre of music as well as news, sports, politics, comedy and talk radio.

And here’s the kicker on their low stock price.

The Street has yet to price into the stock Sirius’ coveted relationship with the auto industry, which help the company add 513,000 subscribers last quarter.

Big Auto-Boom Will Push Sirius Shares Higher

With the coming boom in new vehicle sales, there’s plenty more where that came from.

Here’s what I mean:

Auto analysts note that in November, Americans bought nearly $1 billion worth of new vehicles a day for an annualized 2013 run rate of 16.31 million units, a 7.6% increase over 2012.

Well, roughly 70% of those new cars (about 57 million units) come with Sirius pre-installed in the dashboard .

Logic dictates that if auto industry continues its recovery, that figure could rise to 100 million units in the next few years – giving Sirius a huge profit boost in the process.

Even without that projected growth, Sirius already has a client base larger than any cable or satellite TV firm — nearly 20% bigger than Comcast, the leading cable company, and 25% bigger than DirectTV, the leader in satellite TV.

In fact, Sirius has more subscribers than the Dish Network, Time Warner Cable, Charter Communications and Cablevision combined.

Yet, SIRI trades at just $3.50 a share, pennies on the dollar compared with some of those other firms. By contrast, with just half of Sirius’ subscriber base Time Warner Cable Inc. (NYSE:TWC) cost $131 share, more than 35 times that of SIRI.

For its part, Pandora is priced 7 times higher than Sirius but has a much smaller subscriber base. Pandora says it has 70 million active “users” but J.P. Morgan estimates the actual paid subscriber base at only 3 million.

That makes Sirius 8.5 times bigger than Pandora. With a market cap of $21 billion, Sirius has a 27% operating margin and a 13.5% return on stockholders equity.

To be sure, Sirius has $3.7 billion in debt on its books, much more than I’d like to see. But satellite companies tend to borrow for their capital equipment.

And Sirius generates a lot of cash — more than $600 million in free cash flow last year. It’s using some of that money to buy back roughly $2 billion of its stock.

We believe the stock could double by 2016. And it could happen sooner – by spring, even – if the broader market remains healthy and everything we talk about here works out as we say.

That makes SIRI one of those “special situations” we’ve talked about in the past. Yes, it’s a riskier play but one that is poised to double your money.

By the way, as I’ve mentioned over the last several weeks, stocks aren’t the only investment that I’m watching closely right now

In fact, I’ve got my eye on a phenomenon that is white-hot.

I’m referring to “Bitcoins.”

If you’ve been following the headlines about Bitcoins of late, you know that the “virtual currency” recently soared from $131 to $1,150 in just the past two months – a return of 778%.

It has recently settled down a bit, trading consistently around $800 a Bitcoin. But to me the buying opportunity that just means the buying opportunity is better than ever. Not to mention it’s one heck of a story.

Whether you get involved with Bitcoin now, or want to think about it for the future, I’ve put together an amazing way for you to learn everything about it. Take a look here and you’ll see what I mean.

[Editor’s Note: Michael values your comments. So does our boss. We’re looking to expand our offerings. Tell us how you’re doing and what you’d like to see in the future. Your comments will help.]

12 Responses to The Tech Sector “Anomaly” That Could Double Your Money By Spring

  1. Dave Scharman says:

    Always enjoy your articles and advice. More importantly I make money from them. LOL
    Bitcoin still leaves me a bit unsettled. The fluctuation in a currency without even the tacit backing of the EU, USA or any other sovereign nation, leaves me wondering. Yes, I have grey hair but not so much that I wouldn’t mind investing if I understood Bitcoin better.
    Thanks for the opportunity

  2. Researcher1 says:

    Good analysis on Sirius but what is the John Malone Factor worth. Can Sirius spread its wings in Europe and Asia and how soon will that figure into the bottom line? Any thoughts? Thanks

  3. Rocky Brewer says:

    Michael,

    Being an internet marketer myself, I get a lot of emails everyday promoting digital products and promoting products myself to my subscriber lists.

    But your video in an email stuck out to me like none other the past 3 years or so and I got your training on bitcoin two weeks ago and love it. I have even told my Dr. brother to get it and your newsletters (really informative stuff). It is a small start for me as I did just purchase 5 bitcoins through Coinbase and will study this and your info and hopefully grow from there! Of course this is an all “new” avenue for me and am soaking up all the info I can get now on bitcoin!

    Thanks again for your expertise, training and info! Laguna Beach

  4. M Lands says:

    Hi Michael,

    Great work on the bitcoin virtual portal.
    One area of your bitcoin presentation that welcomes more guidance is mining pools, particularly with respect to hardware requirements for participation. Even with a good computer, decent memory, and cpu, success seems to be minimal at best.

  5. Aline Oary says:

    I appreciate your research and honesty with your opinion. I dislike hype. Just the facts! I need to park some money for taxes. This sounds about right.
    Thanks.

  6. Jeff P. from Canada says:

    You say that you are concerned about the debt that Sirius is carrying. So am I, and that is exactly why I would not invest in this business. Instead of buying back its own stock, the management should be paying off its debt before the eventual rise of interest rates. I believe that this is a huge mistake on management’s part and the combination of high debt in a rising interest rate environment and poor management decisions, will keep me away from this stock.

  7. Catharina Thorne says:

    Have decided to take the plunge and bought the shares, fingers crossed.
    Thanks for the interesting analysis.

    Catharina T.

  8. Mattski says:

    I agree with your analysis. Plus, satellite radio is available anywhere, Pandora only where you have internet connectivity. Of course, 4G wireless is quickly reaching 100% coverage, but until carriers stop charging per unit of data, streaming content gets cost-prohibitive for the consumer pretty quickly.

    I’ve worked for and spent time with both John Malone and Charlie Ergen (DISH Network) at various times over the past 30 years. Both are quite personable and very tech savvy, but I’d rather put my trust in Malone.

    Would be curious, Michael, to hear your analysis of TuneIn radio vs. Pandora.

    • William Patalon III says:

      Mattski:

      A nice bit of analysis on your part. Well done. I forwarded this to Michael to make sure he sees it. He typically reads all these, but we’ve been pretty busy with the launch of his new monthly newsletter this week.

      I will pass this along.

      Thanks for taking the time to write … and again, for the very intriguing bit of analysis.

      Respectfully yours;

      William Patalon III
      Executive Editor
      Money Morning and Private Briefing

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