Last month, Sirius XM (NASDAQ: SIRI) completed a series of complex spin-off and merger changes involving privately held Liberty Media. The result consolidates ownership under one ticker, allowing the new company to function independently. In addition, Sirius
The stock price initially fell in response to the changes, in part because reverse stock splits are a classic red flag, a warning for companies in trouble. But unlike most reverse-split cases, Sirius XM’s core business is financially healthy. It’s a new start that will hopefully bring big things to a company that has stagnated in recent years.
Is this the start of a bright future for Sirius XM and its shareholders? Or will this end badly? Here’s what you need to know.
Can Sirius revive growth?
Sirius XM is best known for satellite radio, which it has dominated since Sirius merged with XM in 2008. The company’s main sales channel is the automotive sector; many new vehicles come with a free trial period in the hope that you will become a paying subscriber. Sirius XM has evolved in pursuit of growth. In 2019, it acquired internet streaming service Pandora to expand its reach beyond satellite radio. The company also launched a free ad-supported service to generate ad revenue.
Paid subscriptions are still Sirius XM’s main source of revenue. The company generated $6.3 billion from its 33 million paying subscribers last year, compared to $1.8 billion from ads targeted to its other 117 million “free” listeners. Sirius XM’s biggest problem is that its paid subscriptions have stabilized. The company had about 32.7 million paying subscribers at the end of 2017, so that number has only increased by about 300,000 over the past six years.
This stagnation is putting pressure on growth. Sales have fallen since mid-2022 and analysts expect a further deterioration next year:
One challenge is that Sirius XM is struggling to interest younger generations in satellite radio, a somewhat outdated technology. Today, vehicles are equipped with software to integrate smartphones into the entertainment system, and companies like that Apple And Spotify provide easy and inexpensive access to high-quality audio content.
It’s a challenge Sirius XM must solve to achieve the growth needed to make the stock a winner.
Potential double-digit returns at a bargain price.
Despite the growth hurdles, Sirius XM is a very profitable company. Its 60% gross margins are among the best in the media industry, and Sirius XM retains paid subscribers well. The churn rate of 1.5% is well below Spotify’s 3.9%. As a result, Sirius XM generates a fair amount of free cash flow that management can use to create value for shareholders.
The company pays out a nice dividend that yields 4.7% at the current share price. That will cost Sirius XM just $409 million of its expected $1.1 billion cash flow this year, leaving plenty of room to pay down its debt. Additionally, analysts estimate that Sirius XM will grow earnings an average of 10% per year over the next three to five years. The company is expanding its pricing plans to give users more options that will hopefully drive subscriber growth.
If all goes according to plan, the stock could maintain its current valuation and potentially earn an annualized return of 14% to 15%. The stock’s questionable track record has left the market somewhat skeptical. Today, Sirius
Can Sirius XM set you up for life?
Sirius XM is an established company that occupies a niche in the competitive audio media industry. I don’t see much room or opportunity for the company to reinvent itself, which means the stock’s upside will come down to how management runs the existing business and uses cash flow to create value for investors.
The stock’s low valuation gives investors a margin of safety and could boost returns if Sirius XM surprises Wall Street and achieves a higher valuation. But life-changing investment returns require consistent long-term growth, and Sirius XM doesn’t have a clear path to achieving this. Management has a long-term goal of 50 million subscribers, but setting a goal is not the same as achieving it.
Sirius
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Apple and Spotify Technology. The Motley Fool has a disclosure policy.
Could Buying Sirius XM Stock Today Give You a Lifetime? was originally published by The Motley Fool
