Sirius XM Holdings Inc. (NASDAQ:SIRI) has been in tune with investors this year, with the SIRI stock price up about 22%. To put this performance in perspective, the return for the past five years was an average of 5.58%.
InvestorPlace contributor James Brumley has recently set forth some reasons for the bullishness. He points out that the satellite radio business is scalable, and that SIRI has the advantage of premium content offerings, which has been key for customer loyalty.
The company has also been disciplined with cost cutting — such as with its headcount as well as policies on royalty rates — which has helped boost EBITDA. During the latest quarter, there was a 12% increase to $429 million. In fact, this marked the highest EBITDA margin in its history, hitting 39.9%.
And of course, SIRI has the advantage of consistent recurring revenues that have provided a nice cushion.
Now while all these factors are certainly critical, I still think there could be some static for SIRI stock in the coming year.
So then, what are the issues? What could make SIRI stock stumble? Well, let’s take a look at three potential problems.
SIRI Stock Problem #1 – Technology Disruption
In today’s rapidly changing world, the market for satellite radio seems kind of a relic of the past. Let’s face it, smartphones are very popular for listening to music. It’s convenient and provides for personalized experiences.
Just some of the players in this market include Amazon.com, Inc. (NASDAQ:AMZN), Apple Inc. (NASDAQ:AAPL), Alphabet Inc (NASDAQ:GOOGL) and Spotify. Most of these companies have tremendous resources and massive user bases.
Something else to consider is that internet-based systems can be easily integrated into cars, which goes to the heart of Sirius. The two notable players in this market include AAPL and GOOGL.
Now SIRI has been trying to expand outside of its core, as seen with the recent $480-million investment in Pandora Media Inc (NYSE:P). But unfortunately, that company has been struggling, with its shares off a grueling 64% this year!
SIRI Stock Problem #2 – Slowing Growth
SIRI has been around since the early 1990s. So it is only natural that the growth rate has been decelerating lately as the market has gotten saturated. Note that the number subscribers is roughly 32.2 million.
During the latest quarter, the revenues increased by 8% to $1.4 billion, and the net additions to the user base was only 119,000.
There are also some other factors to keep in mind. First of all, there was a negative impact from the string of hurricanes in the U.S. Granted, these are mostly short-term events.
However, there is something else that could be longer-lasting, which is the deceleration in auto sales. All in all, it looks like auto sales in the U.S. are at peak levels. In other words, it could get harder to churn out growth over the next few years.
SIRI Stock Problem #3 – High Valuation
When it comes to initiatives to drive the SIRI stock price, the moves have been mixed. On the positive side, there continues to be aggressive buybacks. For the most recent quarter, the company bought back $211 million in SIRI stock. But as for the dividend policy, it has been meager. Consider that the current yield is only 0.9%.
Yet perhaps the biggest knock on SIRI stock is the valuation, with the price-to-earnings multiple at 30X. Hey, Facebook Inc (NASDAQ:FB) trades at 34X, and GOOGL sports a multiple of 36X.
No doubt, the predictable subscription revenue stream deserves a premium on SIRI stock. Although, when accounting for the single-digit top-line growth and the potential threats to the business, the valuation does seem to be on the high side.
Tom Taulli is 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.