Premium broadcasting giant Sirius XM (NASDAQ:SIRI) has finally agreed to acquire streaming giant Pandora (NYSE:P) in an all-stock deal that values Pandora at $3.5 billion. Pandora stock is up slightly on the news, while SIRI stock is down big.
This deal ends a year of rumors and speculation that Sirius would acquire Pandora. Last year, Sirius invested $480 million to acquire nearly 20% of Pandora. Many market observers saw that as the seeds for an acquisition. Indeed, it was. Now, Sirius is acquiring all of Pandora for $3.5 billion.
Why the divergence in market reaction then? Why is Sirius XM stock down while Pandora stock is up?
Basically, investors are selling SIRI stock because they fear that Sirius overpaid for what many view as a money-losing, zero-growth platform. Just do the math. Last year, Sirius invested $480 million for a nearly 20% stake, implying a valuation of just over $2.4 billion. Sirius is paying $3.5 billion today. That is nearly 50% more. But, is Pandora really worth 50% more today than it was last year?
No. Investors just bid up Pandora stock in anticipation of an acquisition offer from Sirius. That pushed up Pandora’s valuation, and because acquisitions almost always happen at premiums, it pushed up Pandora’s takeover price. Net result? Sirius is paying $3.5 billion for a company that isn’t profitable and is set to do just $1.5 billion in sales this year.
That is why SIRI stock is down on this news.
Regardless of the takeover price, however, the Pandora acquisition is the best move forward for both Sirius and Pandora. Sirius needs a streaming arm and mobile exposure. Pandora needs structure and growth. This buyout gives each company what they need, and the combined operating entity going forward should be able to survive in today’s hyper-competitive audio market.
Investment takeaway? Patience will be rewarded, and if SIRI stock keeps dropping, this is a dip worth buying.
This Acquisition Needed To Happen
Let’s face it. Although each company maintains a sizable presence in the audio market, both Sirius and Pandora face serious threats going forward.
Pandora is the more troubled of the two. Pandora’s active listener base and total listener hours have been in perpetual decline for several years now, and although the company’s new paid streaming service is growing, growth is anemic relative to paid streaming competitors Apple (NASDAQ:AAPL) and Spotify (NYSE:SPOT). Broadly speaking, this company has lost relevance while its competitors have dominated the market.
Meanwhile, Sirius has actually continued to grow despite rising streaming threats. But, that growth is anemic (mid-single digit subscriber growth). And, it really is only a matter of time before infotainment audio solutions get phased out with mobile audio solutions as cars and phones become synced. Thus, there is a major secular headwind facing Sirius, and that is the potential death of infotainment audio due to IoT growth.
Overall, neither of these companies are really in a great position right now. Pandora is rapidly losing relevance, and Sirius doesn’t have exposure where it needs exposure to survive over the next several years.
This acquisition needed to happen because it puts both companies in a much better operating position. Namely, Sirius now has a streaming arm, robust mobile exposure, and a still nascent, but potentially huge audio advertising business. With those three things, Sirius should be able to survive regardless of a phase out of infotainment audio solutions.
From this perspective, the acquisition adds stability to Sirius XM stock’s long-term growth narrative. More stability is always rewarded with a bigger multiple. Thus, once this near-term selloff fades, SIRI stock should bounce back due to both earnings growth and multiple expansion.
Sirius XM Stock Will Become Stronger
Sirius XM has been a stable growth machine for several years. This growth is reflected in the stock price. Over the past five years, SIRI stock has gone from $3 to over $6.
This rally should continue.
The Pandora acquisition is a risky one. But, as mentioned earlier, it is a necessary one because Sirius needed streaming and mobile exposure to ensure its long-term survival. The market will eventually realize this. When it does, the selloff will reverse course, and SIRI stock will benefit from a near-term bounce back.
Longer term, there are major question marks regarding the profitability of Pandora. But, if this company can successfully ramp its paid streaming business in the secular growth paid streaming music market, then that will provide a clearer path towards profitability for Pandora. Accelerated growth in Pandora’s streaming services seems likely, since Sirius XM will now be able to bundle in some exclusive content and increase Pandora’s value prop.
Overall, SIRI stock should become stronger as a result of this acquisition. I don’t expect explosive gains from here. But, once near-term noise fades, this stock should resume its stable, long-term uptrend.
Bottom Line on SIRI Stock
The Pandora acquisition is the best move for this company, and investors will eventually realize that. Thus, if SIRI stock keeps dropping in the wake of this acquisition, the stock will eventually become a compelling “buy the dip” situation.
As of this writing, Luke Lango was long AAPL.