In the digital age, you might think radio is passé. But not if it's user-selected digital audio delivered coast-to-coast via satellite. XM Satellite Radio Holdings (Nasdaq: XMSR) is building the next generation of radio. No longer will drivers need to tune their radios to the stations in a relatively small coverage area. No longer will radio signals be subject to interference and other annoyances. No longer will listeners need to endure tireless ads or programming that does not meet their needs in order to hear what does.
Given these options and the prevalence of radio listeners, especially during drive time, the XM concept seems a guaranteed winner. True, not everyone will want to pay a monthly subscription fee to receive several of the 100 stations offered, but even if 10 percent of the commuters on the road subscribed, the company would be profitable in a short time.
Investors agree. After offering at 12 in October, the stock has had two rounds of flips before bottoming out at $18 a share in April. Since that time, it's been on a steady climb, reaching up to 40 as I write this. In fact, its rapid ascent is the only thing that worries me. By the time you read this, it should be trading at $50 per share, which makes it more of a long-term play than I typically recommend. Despite being relatively highly valued, four out of five analysts give it a strong buy rating.
But our ComputerUser investment fund could use a few long-term winners right now. Face it, I started writing this column just before the Nasdaq crash. All of the stocks I have recommended are traded on the beleaguered index. So despite running well ahead of the Nasdaq in that time frame (the fund is up 34 percent at the time of writing), our picks have not performed as I thought they would. Its lone dog, XYBR, is a long-term play that should pan out. Still, I could use another long-term play to balance out the struggling wearable-computer maker.
No self-respecting analyst would buy into the hype without a serious look at the challenges ahead for XM. And there are plenty of them, which is why this is a long-term holding. First and foremost, some might think the competition in wireless Internet radio would be pretty stiff. With the coming crush of car computers with wireless Internet connections, many consumers will prefer to get free Internet radio for their commutes. Second, traditional radio is good enough for a lot of folks.
Despite those factors, urban sprawl is not slowing down, and commuters are continuing to push the envelope of wireless coverage. Satellite is not perfect (especially around tall buildings and in tunnels) but it is so much better than the alternatives that many will pay the subscription fee for better service.
Indeed, when I think of all the limitations of AM and FM radio, I can't help but salivate over XM. But as with any new thing, a killer app does not necessarily guarantee success. You also need widespread support from industry partners. XM Satellite Radio is beginning to garner this support. It has signed Alpine, Delphi, Pioneer, and Sharp to make receivers for the service. And it has an agreement with investor General Motors (23 percent) to install receiver equipment in GM cars.
With many top-level manufacturers making equipment before widespread product marketing, I expect most major audio manufactures to have offerings within the year. And commuters will adopt the offering as fast as any new technology. I'm adding this one to the fund and hanging on for the long haul.
