Step by step, Sirius XM dismantles the shorts. Image source: Sirius XM.
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The number of naysayers betting against Sirius XM Radio(NASDAQ: SIRI)continues to grow. There were 228.6 million shares of the satellite radio provider sold short as of July 15, and that's the highest that the short interest has been in more than a year.
To frame that level of negativism properly, there were just 195.3 million shares of Sirius XM stock sold short as of the end of June and just 147.3 million bearish wagers placed when the year began. Not all of the 228.6 million shares sold short are necessarily in the hands of pessimistic speculators. Some may be investors of Liberty SiriusXM(NASDAQ: LSXMA), the tracking stock that was spun out in April and has traded at a discount to Sirius XM stock itself. There may be more than a few arbs out there hoping to go long Liberty SiriusXM and short Sirius XM hoping that the gap narrows.
However, short interest has moved higher in six of the seven reporting periods since the Liberty SiriusXM tracking stock hit the market. There were plenty of shorts before the new way to play the media giant, and there are far more people now betting a shortfall.
Shorting any stock is dangerous, but let's go over some of the reasons why betting against the fast-growing provider of premium radio can turn out to be a bad idea.
1. It could make an acquisition that the market actually likes
Sirius XM is a money machine. It expects to generate nearly $1.5 billion in free cash flow this year. It's been using most of its money to buy back stock, but it won't be a surprise if it uses some of its dough -- or a combination of its appreciating stock and cash -- to make a needle-moving acquisition.
Sirius XM has made just one major purchase since the 2008 merger between Sirius and XM. Sirius XM paid $530 million for Agero three summers ago, giving it some skin in the auto-related telematics market.
There's been plenty of chatter surrounding Sirius XM andPandora Media (NYSE: P)to get together, andThe Wall Street Journal reported two weeks ago thatLiberty Media (NASDAQ: LMCA)offered to snap up Pandora at $15 a share which was rebuffed by Pandora as being too low. It would have combined Pandora with its majority-owned Sirius XM, creating a monster of next-gen radio platforms.
Pandora's been out of favor given its profitless state and stagnancy in listenership, but that's child's play for the company that's been able to get 30.6 million people to embrace premium satellite radio. It's a deal that makes more sense the more you think about it
2. Don't bet against a serial low baller when it comes to guidance
One of the nuggets in Sirius XM's quarterly report last weekwas that it raised its guidance across all of its metrics. From year-end subscriber count to the generation of revenue and free cash flow, the media darling's prognosis seems to get rosier with every passing quarter. We saw a perfect example last year when Sirius XM kicked off 2015 by targeting 1.4 million net additions. That figure was bumped higher every single quarter, and by the end of the year it had closed out 2015 with 2.3 million more subscribers than it had when the year began.
Whether Sirius XM's fundamentals keep improving every few months or the company has simply mastered the art of under-promising and over-delivering, it's not the kind of stock that pays off for shorts. It's not a surprise to see the stock hit a new 10-year high last week following its results.
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Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Pandora Media. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.