Among digital technology companies, few are as disappointing as Sirius XM Holdings Inc. (SIRI).
Yes, there are organizations that have performed a lot worse than SIRI. However, with Sirius XM being the pioneer of the satellite radio concept, one would be forgiven in expecting a lot more from SIRI stock.
What people today take for granted — digital streaming of high-quality audio broadcasting with minimal interruptions — was largely the brainchild of Sirius XM back in the early 1990s. Yet being the first to market has so far yielded little results.
The numbers speak for themselves. Since its initial public offering on Sept. 13, 1994, SIRI has lost nearly 21% in the financial markets. Over the past two years, shares were virtually at standstill — hardly a selling point for anyone considering a stab.
Year-to-date, Sirius XM shares are down 12%, more than double the losses in the benchmark S&P 500, and noticeably worse than the Nasdaq Composite, in which SIRI stock is listed.
Still, the news isn’t completely bearish. In a little over a week, Sirius XM has moved steadily forward, putting up almost 7% in the markets. While not earth-shattering gains, one would have to go back to October 2015 to see a similar move over the course of six business days.
In addition, SIRI did just enough in the fourth quarter of fiscal year 2015 to hit consensus estimates for earnings per share.
The question moving forward is, which SIRI will show up? The one that hit nearly $70 in the markets during the crazy days of the tech bubble? Or the one that nearly died during the onset of the Great Recession, where SIRI stock could be bought for a nickel?
Where Sirius XM Stands
The evidence points to a healthy balance somewhere down the middle. While it’s hard to envision Sirius XM approaching triple-digit prices, shares are nonetheless vastly undervalued.
Lost in the noise of its fourth-quarter earnings report was subscriber growth: SIRI added 2.3 million in paid subscriptions, bringing its total base to nearly 30 million. This bump-up is rather remarkable given how the broadcasting industry has undergone a paradigm shift with free video-sharing platforms like the Alphabet Inc (GOOG, GOOGL) owned YouTube.
Analysts who instead chose to focus on Sirius XM’s broadly slowing net income trends are missing the forest for the trees. The company has taken smart risks, including the five-year extension of famed radio host Howard Stern’s contract, putting down fears that he may walk out of the satellite radio medium entirely. The Howard Stern Show has proved immensely popular over the years, and the new deal will give Sirius XM access to the often controversial celebrity’s vast media archive.
On the other side of the competitive spectrum, shares of Internet radio company Pandora (P) aren’t doing so hot. If SIRI stock has been beaten up this year, then Pandora is veritably on life support. On a YTD basis, P stock is down 34%. And over the past 52 weeks, Pandora lost nearly 43% in the markets, attempting to realize its full potential but falling well short. It’s no wonder that the company is exploring the idea of seeking a potential suitor.
Whatever that entity may be, it’ll be buying an organization with loads of baggage. The critical problem with Pandora is a lack of conversion — there’s plenty of listeners, but no compelling reason to become a paying subscriber. That’s one of the big reasons why the Internet broadcaster hasn’t turned a profit since its IPO.
You can also detect it from the passiveness of Pandora’s chief executive officer, who stated his belief in the company’s conversion plans. Guess what? Sirius XM is already there!
Bottom Line on SIRI Stock
It’s also worth mentioning that SIRI is buoyed by robust fundamentals. Profitability margins have been consistently in double-digit percentage points since FY 2011 and are among the best in the radio broadcasting industry.
Free cash flow has also risen sharply over the past seven years, helped in part by efforts to control capital expenditures.
SIRI stock isn’t exactly cheap against trailing earnings, however, but investors should look at its proven business model. The company caters more toward the affluent, which are easier to convert to paid subscriptions, especially under trying economic conditions.
Admittedly, Sirius XM has been a loser in the markets in recent years. Luckily, that status is due for a change. SIRI has essentially proven two things — the viability of satellite radio, and the ability to profitably convert listeners into buyers.
These strengths were further affirmed by Sirius XM’s most recent earnings report, though the markets haven’t shown much love yet. That just means investors can get in at attractive prices. SIRI’s success in maintaining relevancy in a tough industry along with its core financial strengths could make it one of the best opportunities of 2016.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
