Sirius XM Holdings Inc (SIRI) Stock Has Been Underestimated for Too Long

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Calling a spade a spade, all of the criticisms about Sirius XM Holdings Inc. (NASDAQ:SIRI) are true. Its growth pace is slowing down as saturation swells. Alternatives like Pandora Media Inc (NYSE:P) and Spotify are genuine competition as cars are increasingly connected to the internet. New car sales are slowing down, crimping the biggest prod for Sirius XM’s growth. All of these bode poorly for Sirius XM stock.

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Look beyond the SIRI stock news headlines though, which are only focused on the basic (and mostly obvious) metrics. A closer look at another, less apparent detail is the reason the Sirius stock quickly reversed Wednesday’s post-earnings announcement lull on Thursday with a pretty respectable bounce.

That detail? The satellite radio business is scalable, meaning the bigger Sirius XM gets, the cheaper (relatively speaking) it is to run. Profits are increasing at a faster clip than the top line is, and unlike rivals Spotify and Pandora, Sirius XM is profitable.

That’s half the battle, in that it speaks to sustainability.

The Rest of the SIRI Stock News

The long version of a short story: Sirius XM turned $1.38 billion worth of revenue into a profit of six cents per share, handily topping expectations for sales of $1.37 billion and earnings of four cents per share of Sirius XM stock. The company saw sales of $1.28 billion in the same quarter a year earlier, when it reported earnings of four cents per share. The SIRI stock dividend paid last quarter put one penny per share in shareholders’ pockets.’

The prod for Wednesday’s dip? It certainly wasn’t the company’s full-year guidance, which was upped on the free cash flow, revenue and EBITDA fronts. Rather, the hang-up is (mostly) slowing subscriber growth. Though Sirius garnered a reasonably healthy 311,000 (net) new self-paying members, after subtracting the 191,000 of those members that were added as part of a paid promotion, only 119,000 regular subscribers were brought into the fold.

The growth in its headcount is slowing down.

Here’s the thing: the slowdown was inevitable, and it is largely irrelevant. The company knew this day was coming, and investors should have known it too. At the same time though, Sirius XM is transition just as it should from an early-growth-phase name to a late-stage growth and recurring revenue name just as it should, with expense growth tapering off and margins beginning to widen.

The graphic below tells the tale. The revenue growth pace is slowing, but expenses are growing at an even slower pace as the company has finally put its royalty headaches in the rear-view mirror and figured out how to cost-effectively compete with internet-based competition.

Sirius XM (SIRI) Results, Outlook
Click to Enlarge

The specifics? Free cash flow last quarter reached a record $434 million. Adjusted EBITDA for Q3 was a record $551 million, while its adjusted EBITDA margins hit an all-time record level of 39.9%.

This is what happen when a business, and in industry, matures and gets into a comfortable though well-defended groove.

Bottom Line for Sirius XM Stock

It’s not sexy, to be sure. Most shareholders would obviously rather see company’s user base grow at an accelerating pace rather than a decelerating pace; one only has to look at the pain Snap Inc (NYSE:SNAP) has dished out for committing the sin of slowing user growth.

Sirius XM isn’t Snap though. It’s been around much, much longer, and the market as well as investors have had more than ample time to figure out the ins and outs (and risks) of the satellite radio business. Whereas it’s not yet clear how many people should be interested in being a regular user of Snapchat, the market more or less knows that the initial wave of satellite radio adopters are on board. From here, subscriber growth is supposed to be tougher. Expenses are also supposed to taper as well, however, and they are.

And to that end, don’t equate slowing user growth with no growth. Sirius XM still expects to add a total of 1.4 million (net) self-paid members this year, with more sure to enroll next year. There’s revenue growth in the company’s future.

Investors do need to adjust their expectations accordingly though. However, that adjustment doesn’t necessarily have to translate into a sudden setback like Wednesday’s pullback. Fortunately by Thursday traders figured this out.

Still, a forward-looking P/E of 26.5 is a tough valuation for a slowing-growth name like Sirius XM to justify. Don’t be surprised if the market simply puts the stock in hibernation while earnings catch up with the stock’s price against the backdrop of the new paradigm.

Or, as fellow Investorplace contributor Vince Martin recently put it, “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.”

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.


Article printed from InvestorPlace Media, https://investorplace.com/2017/10/sirius-xm-stock-long/.

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