by Tom Taulli | March 17, 2014 9:03 am
Media mogul John Malone, who controls Liberty Media (LMCA), has dropped his plan to buy out Sirius XM Holdings (SIRI). Instead, he will split his company into two tracking stocks, which will happen some time later in the year.
So why is the deal off? For the most part, Malone no longer needs access to the balance sheet of SIRI to leverage a buyout of Time Warner Cable (TWC). However, it is certainly possible that he could still ultimately buy SIRI at some point.
Despite all this, SIRI stock has actually been in a downtrend for the past six months, falling roughly 11%. Is it time to think about jumping in, or should investors stay away from SIRI stock without Malone’s involvement?
Here’s a look at the pros and cons of SIRI stock:
Platform: SIRI is one of the world’s largest subscription media businesses, with 25.5 million members. This compares to 6 million for Spotify and 2.5 million for Pandora (P). Of course, a key to the success of SIRI stock is the company’s strong content assets, including access to all the top sports leagues, such as the NFL, NHL, NASCAR, MLB and PGA. There are also a wide assortment of channels for commercial-free music and news channels, like CNN, NPR and FOX. But SIRI has also has had success with its Town Hall Series, which has included interviews with stars like Katie Perry, Eminem and Lady Gaga. And talk show host Howard Stern remains a big draw.
Opportunities: SIRI stock should get a boost from the recovery in the auto market. For example, the current year is expected to see more than 16 million new car sales. And SIRI has been aggressive in the used car segment, as well. The company is also looking at the potential of the connected-car trend. To this end, the company recently purchased Agero’s connected car unit for $530 million in cash. It is a top provider of telematics services, such as safety and security features.
Financials: The subscription model has resulted in strong recurring revenues. And yes, the EBITDA margins are juicy, at about 41% or so — higher than other subscriber media businesses like Comcast (CMCSA), Time Warner Cable and Charter Communications (CHTR). But SIRI stock has also been able to crank up revenues. Last year, revenues increased by a healthy 12% to $3.8 billion thanks to a combination of pricing changes and subscriber growth.
Share Structure: Keep in mind that Liberty has a 53% stake in Siri. This means that it is highly unlikely for a rival bidder to come in for the minority position, as there would be no way to gain control. In other words, SIRI stock really does not have much buyout value. Let’s face it, Malone has become a billionaire because of his savvy negation skills and convoluted corporate structures.
Alternatives: True, SIRI says that its satellite system is much better than an Internet-driven approach. But customers may not care much. The fact is that rivals like Pandora and Spotify are getting lots of traction in the market. There will also be serious competition from telcos like AT&T (T) and Verizon (VZ), which are gunning for the connected-car market. And don’t count out Apple (AAPL), which is also ramping up its efforts in the market.
Music Royalties: Royalties comprise a sizable chunk of the expenses for SIRI stock. The company has deals with the major rights-holding organizations — like BMI, ASCAP and SESAC — through 2016. However, those organizations have a tendency to keep increasing rates, which would put pressure on margins over time.
All in all, SIRI stock is backed by a solid business. The company has maintained steady user growth, and the cash flows remain robust. There should also be a long-term boost from the move into the market for connected cars.
Yet it seems that things could still get tougher, especially as the competition is gets more intense. Another wildcard is the arrangement with Howard Stern. Stern plans to leave SIRI after his contract expires in 2015. If he does, there could be erosion in the company’s membership.
So should you buy SIRI stock? No — for now, there are too many headwinds that could put pressures on the price.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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