In early 2009, during the worst of the financial crisis, Sirius XM Holdings Inc. (NASDAQ:SIRI) looked headed for bankruptcy. Reports at the time suggested the company even hired bankruptcy lawyers. It was only saved by a $530-million loan from Liberty Media Corporation (NASDAQ:FWONA). Eight-plus years later, Sirius XM stock is worth $26 billion, and Sirius stock has gained roughly 4,000% from its early-2009 lows.
Clearly, the worst is behind Sirius XM stock. The company was able to refinance its debt at much lower rates earlier this year. This saved interest expense and showed how much confidence the bond markets have in the company. There’s even a SIRI stock dividend, which yields 0.7%. But that doesn’t necessarily mean that all SIRI stock news is good, or that Sirius XM stock is a buy going forward.
After all, this is a stock trading at roughly 18x the company’s guidance for 2017 free cash flow, and a hefty 16x on an EV/EBITDA basis. Recent growth — first-half revenue rose 7% and adjusted EBITDA almost 13%, both year-over-year — seems to support those multiples. But that growth is going to slow, given declining new car sales and potential market saturation in the U.S. Investments in Sirius XM Canada and Pandora Media Inc (NYSE:P) have garnered attention but simply aren’t large enough to move the needle.
SIRI stock isn’t a short by any means, and it may have more room to run in an increasingly bullish broad market. But from a long-term standpoint, there are some concerns that no longer look priced in.
SIRI Stock News: The Good and Bad
Right now, Sirius XM stock has a decent bull case. Multiples are a little high, but the company is coming off a blowout Q2 that drove SIRI stock to an all-time high. Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A,BRK.B) now has a sizable stake in the company. Revenue has been growing steadily for years, and margins have expanded as well. And Sirius XM offers an attractive, reasonably priced product. I’m even a subscriber myself.
The underlying question, however, is how long will that growth last? Sirius steadily has increased its penetration rate in new cars, which reached 75% in 2016, according to the Q4 conference call. But conversion (the number of units with active subscriptions) actually has trended down modestly, dropping a point in each of the last two years to 39%. So far, that’s had no effect on profits, as subscriber acquisition costs and monthly expenses both have trended down.
The problem is that those new car sales are slowing. There’s a reason why Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) trade at single-digit earnings multiples. As I’ve written before, there are very real concerns about “peak auto” in the U.S. And at the least, those lower new car sales create less opportunity for Sirius XM revenue. Getting a new car owner to maintain a trial subscription is much easier than acquiring a customer who drives a used car, particularly if that car doesn’t have a unit installed.
That potentially shrinking base is an issue for Sirius going forward. New car owners are the easiest, and cheapest, group for Sirius XM to target. But going forward, there will be a lot fewer of those new car owners.
Sirius XM Stock Long Term
Longer term, there’s the obvious issue of competition. Everyone from Pandora to Spotify to Apple Inc. (NASDAQ:AAPL) and Amazon.com, Inc. (NASDAQ:AMZN) is targeting the streaming space. Better wireless coverage, particularly as that industry moves to 5G, and better “infotainment” offers in vehicles potentially mean Sirius offerings could be sidestepped. The advantage of Sirius over terrestrial radio is abundantly clear. Its edge over Internet streaming, particularly as that coverage continues to improve, is far less clear.
To be sure, this may be a growth opportunity for Sirius. (The company, for instance, supplies map and weather data in my vehicle.) But at the least, there’s a substantial amount of uncertainty as to how the car of the future will look, and what Sirius XM’s role will be in that car.
New Initiatives Not Enough for Sirius XM Stock
If Sirius XM stays on its current growth trend, Sirius XM stock probably has incremental upside. Considering debt, the stock does look a touch expensive. But impressive free cash flow capability allows for further deleveraging, and interest expense savings will continue into 2018, at least.
But I’m simply not convinced that growth trend will hold. Whether it’s lower new vehicle sales, competition from streaming services, or some combination, I’d expect bottom-line deceleration for Sirius XM stock. And I don’t see Pandora or the company’s recently increased ownership in Sirius XM Canada as fixing that problem.
The company invested $480 million in Pandora. Sirius values its investment in the Canadian operations at about $200 million. That combination simply isn’t enough to significantly impact the $26-billion valuation of SIRI stock.
Rather, investors still are reliant on the core business. And it seems like there are too many potential challenges to that business to get excited about paying the current multiples, even as reasonable as they appear.
As of this writing, Vince Martin has no positions in any securities mentioned.
