Tune In: Turbo-Charged Potential

07/01/2005 12:00 am EST


Jamie Dlugosch

Editor, The Rational Investor

"Companies that excel in bringing technology to market will be rewarded with higher stock prices," says Jamie Dlugosch. "We look for products with monster potential, with stocks trading at discounted prices." Here, he looks at plays in MP3 media and satellite radio.

"I think the shares of Sirius Satellite Radio (SIRI NASDAQ) is significantly discounted from future value. How can that be for a company with less than $100 million in annual sales and a market cap of $8 billion? Over time, I expect to see a satellite radio in every car in this country. In seven years we will not remember that we were ever beholden to the traditional AM/FM radio. The company is on track for 2.7 million subscribers by the end of this year. That is a mere fraction of the estimated total market of 50 to 100 million satellite radio users. With a 40% growth rate in subscriptions over the next seven years, the company will be at 28.5 million subscribers. Using current pricing, that subscriber base would generate approximately $4.4 billion in revenue. Add in an equal amount of advertising and streaming video service revenue, and the company will generate approximately $8 billion in total revenue in seven years. Using a modest multiple of 2.5 times revenue brings us to a price of $20 per share. It may take five to seven years, but if SIRI reaches our objective, investors today would more than triple their initial investment. And while there is obviously risk that the firm will fail in its endeavor, there are few investments in the market that offer similar potential.

"PortalPlayer (PLAY NASDAQ) is a semiconductor play on the emergence and continued dominance of MP3 players. The company is a leading supplier for the amazingly popular Apple iPod and other players. After going public at the end of last year, PLAY lost nearly half of its initial market cap. The timing for the offering could not have been worse, as the end of the holiday season reduced demand for its products, and investors simply lost patience in the early months of 2005. But the future prospects of PLAY are fantastic. The company is expected to earn $1.08 in 2005 after earning a modest $0.57 last year. On a forward basis, the company trades for less than 19 times earnings. Analysts are guessing that demand for these products will slow in the future, but we know that such guesstimating tends to happen too early. The popularity for media players is growing, and with satellite radio and other exciting developments like podcasting arriving on the scene, demand should be healthy for some time. We believe we have found a company with huge potential that's trading at a fairly substantial discount to its future rate of growth. Buy PLAY up to $23 per share and our target is $46.

"As part of a diversified portfolio, owning stories like SIRI and PLAY can turbo-charge returns. Indeed, the risk is high, but our due diligence suggests that the odds for success are in our favor. We cannot predict the future, but we do see the multiple sources of revenue that can propel valuations higher. We want to own these stocks today in order to grab a piece of that pie. Right I cannot think of two more interesting long-term stories from a growth perspective. Buying in advance of the holiday season would be a wise move here. New users will reinvigorate demand. For example, imagine a combination of iPod and Sirius. Now that would be fantastically 'rational' and profitable for both companies."

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