NEW YORK (CNN/Money) -
Wall Street has found a new darling in Sirius Satellite Radio as the stock became the most heavily traded issue Wednesday and led the Nasdaq again Thursday -- pushing the shares up 28 percent so far this week.
But is this attention a sign that the money-losing broadcaster will stick around, or is it another case of a paper champ in the tech sector?
Although Sirius shares began the month below $1 and were in danger of being delisted, they have surged on improved prospects for the satellite radio industry, which currently consists of only two players, Sirius and No. 1 XM Satellite Radio.
Sirius (SIRI: down $0.04 to $1.37, Research, Estimates) shares piqued investors' interest Tuesday after Ford Motor said it will offer the service as a dealer option in several of next year's models, easing fears that the world's second-largest automaker might want to team up with rival XM Satellite.
"There was some speculation that Ford would find a way to switch, but it's a positive to hear confirmation of the agreement," said Thomas Watts, analyst with SG Cowen Securities. Watts upgraded Sirius Thursday to "outperform" from "market perform."
Watts does not own shares of Sirius nor does SG Cowen have a banking relationship with the firm.
Ford said it will offer Sirius service in 10 of its 2004 models, including the Ford Thunderbird, Mustang, Sport Trac and Expedition. It will be available in the Mercury Mountaineer and Lincoln Navigator, Aviator, LS and Town Car as well.
Another boon for Sirius came Wednesday when the firm reported that its subscribers jumped 127 percent to 68,000 in the first quarter, topping most analysts' expectations. The company also reported a profit of 16 cents per share due to a $256.5 million gain when it converted 91 percent of its debt into equity in March.
Sanders Morris Harris analyst Steve Mather said he raised his subscriber estimates a couple weeks ago to 60,000. He attributed Sirius topping the estimate to increased promotion, which the company said in a regulatory filing it plans to maintain in future quarters.
But despite the attention and spate of good news Sirius has received this week, the company and its stock may not be out of the woods yet.
"The potential upside is significant, but we recognize the near-term risk," said Sanders' Mather, who rates the stock a "buy." He does not own Sirius shares nor does his firm have a banking relationship with the company.
One risk cited for Sirius is the limited reception by the automakers, especially Ford.
Although the automaker's announcement was a "sigh of relief" for the company, the number of models that offer Sirius is "lower than I expected," SG Cowen's Watts said. "It was also disappointing that the radios will be dealer installed and not factory installed. This signals a cautious approach from Ford."
A Ford spokeswoman said it can offer Sirius only in models with a certain audio feature that is compatible with the service.
Another potential roadblock for the company is finding additional funding. In its quarterly regulatory filing, Sirius said it has enough money to operate through the second quarter of 2004, but it will need about $100 million more before it breaks even on a cash flow basis.
New York-based Sirius added that it believes it can obtain the financing, but it still faces risks including the length of time and costs necessary to sign up the 2 million subscribers needed to sustain operations.
John LaForge, portfolio manager of Phoenix-Hollister Small Cap Value Fund, said he does not believe the company will have a problem raising the funds it needs to break even.
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"They have almost no bondholders after they converted most of their debt to equity, and the shareholders like me will have two options," he noted. "We can let the stock go to zero or we can lend them more money through a secondary stock offering."
LaForge said his fund owns about 6 to 7 million Sirius shares, but isn't currently buying more. "We don't need to own 12 million," he said.
A potential concern for Sirius investors is the stock's recent rally. After lingering below $1 since February, the shares have soared 258 percent off their March 14 low of 38 cents, harking back to the days of the tech bubble.
LaForge noted that the stock is not cheap, but "with any new technology, you're never going to say the stock is cheap because they're expecting so much growth." He said Wednesday that he thinks the stock has another $1 in gains to go. After Thursday's move, that would put the price target at about $2.35.
For holdovers from the tech mania, a play in Sirius shares could be worth the risk.
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