Down more than 60% from the 2018 peak and still within sight of the 12-year low hit earlier this month, the idea is to buy shares of Sirius XM Holdings (NASDAQ: SIRI) at this point it’s more than a little discouraging. It amounts to catching a falling knife – something you normally wouldn’t even want to attempt because of the obvious danger.
And yet there’s actually a three-pronged bullish case to be made for doing just that sooner rather than later. It’s just not an argument that anyone wants to consider.
Three reasons to buy Sirius XM stock like there’s no tomorrow
Sirius XM is the result of the 2008 merger of the satellite radio companies Sirius and
The combined company continued to do well enough beyond that point, growing its customer base to a peak of just under 35 million paying subscribers at the end of 2019. By tapping into the appeal of celebrities like Howard Stern, Kevin Hart and several exclusive sports commentators and a slew of artist-specific and genre-specific music channels have helped immensely.
However, as might have been predicted, technology continued to evolve enough to disrupt the business. Subscribers gradually unsubscribe (or never sign up in the first place) because they have access to a range of alternatives, such as Apple Music and (now owned by Sirius) Pandora. More and more cars are also connected, or at least can be connected to drivers’ smartphones that can send digital content to a vehicle’s audio system. End result? As of March of this year, Sirius XM’s subscriber base has dropped to 33 million.
The market obviously saw this headwind coming. That’s why stocks peaked nearly six years ago and began what would eventually become a long, turbulent downturn.
However, the sellers have demonstrably exceeded their target. And you can use their misstep to your advantage. In fact, you’ll want to do this for three notable reasons.
1. The stock is cheap
Sirius XM may face more than a few competitive problems that limit profits these days. However, the stock more than reflects this risk. The stock price is currently just ten times this year’s expected earnings per share of $0.30, and just under ten times next year’s expected earnings of $0.32 per share. That’s cheaper than the stock since the merger of XM and Sirius.
And for the record, analysts agree with this valuation-based argument. Their current consensus price target is $3.93, which is over 30% above the current share price.
2. The dividend is attractive (and protected)
The stock’s prolonged weakness has led to another compelling result: the dividend yield has been inflated. Sirius XM’s forward-looking dividend yield is roughly a respectable 3.6%. By the way, that’s based on a quarterly dividend that has been increased every year since it started paying out in 2016. The growth streak is not likely to be reversed anytime soon.
It’s also worth pointing out that despite the obvious headwinds, this payout can still be easily financed. Only about a third of Sirius XM’s revenue is paid out to shareholders in the form of dividends, leaving plenty of room for maneuver. The company’s cash flow and net income also remain surprisingly stable in light of the challenges.
3. Sirius XM has a future
Last but certainly not least, and contrary to popular belief, Sirius XM is not doomed due to the advent of more convenient alternative forms of audio entertainment.
That doesn’t mean this future will be easy. The company’s easiest and fastest days of growth are certainly in the past.
Sirius XM, however, recognizes that the market is changing and is doing something about it. Creating Internet-accessible (as opposed to satellite-delivered) audio content is one such initiative. The Pandora acquisition is another. The recent launch of Unified ID 2.0 is another, allowing advertisers of its ad-supported programming to more precisely target customers in an environment that hides the unique digital footprints of Internet users. The company also recognizes the importance of being able to leverage the exclusivity of its on-air celebrities, such as the aforementioned Howard Stern. Thanks to its existing customer base, it is a favorite place for established names to launch their podcasts and shows, keeping consumers interested and willing to pay for the Sirius XM service.
The continued sell-off in the stock suggests that most investors are not yet seeing – or at least not fully appreciating – this dynamic.
Sirius XM stock isn’t for everyone, but…
Still, it’s not a good choice for everyone’s wallet. For example, if you’re looking for massive growth, this probably isn’t for you, simply because there’s little to none of that on the horizon. The audio entertainment industry is already busy in all corners. It’s also not an ideal choice for income-oriented investors who can’t tolerate more than a little volatility. This ticker can remain anywhere on the map, even though from here it sees the bigger picture upside down.
However, if you’re looking for above-average income from undervalued, undervalued stocks, Sirius XM is an attractive idea for anyone who already owns one or two less volatile dividend payers.
Just don’t wait. Other investors may soon discover all this.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Apple. The Motley Fool has a disclosure policy.
3 Reasons to Buy Sirius XM Stock Like There’s No Tomorrow was originally published by The Motley Fool
