For a majority of the past five years, premium broadcasting giant SiriusXM (NASDAQ:SIRI) has been characterized as a robust turnaround story. A few years ago, everyone wrote off SiriusXM as dead considering the secular shift away from linear programming and toward internet programming. But, SiriusXM has managed to not only compete, it actually thrived in the streaming era. As a result, SIRI stock had more than doubled from $3 in 2014 to over $7 in 2018.
That rally, has hit a major speed-bump recently. SIRI stock has dropped into bear market territory due to a confluence of headwinds. First, the market was concerned about the company’s acquisition of money-losing streamer Pandora (NYSE:P). Second, entertainment valuations have been called into question considering the recent underperformance from Netflix (NASDAQ:NFLX) stock. And third, the whole market has been beaten up by rising interest rates, tariffs and the threat of slower economic growth.
In response to all those headwinds, SIRI stock has dropped more than 20% over the past few months.
But, this major selloff could reverse course soon. SiriusXM reports third-quarter numbers before the bell on Wednesday. I think those numbers will be good. Meanwhile, SIRI stock trades at a discount to historical standards across the board and essentially sits as far below its 200-day moving average as it has since 2010.
In other words, you have a hugely beaten up stock with low expectations gearing up to report what should be a strong quarter. That setup leads me to believe that SIRI stock could pop in a meaningful way following the third-quarter print.
SiriusXM’s Q3 Numbers Should Be Strong
Contrary to popular perception, SiriusXM has actually done quite well over the past several years despite rising competition from Pandora, SoundCloud, and Spotify (NYSE:SPOT).
Over the past five years, SiriusXM has consistently grown its subscriber base, raised prices, maintained low churn and supported positive and healthy revenue growth. SiriusXM has been able to do this despite rising competition by differentiating its service from other streaming platforms through unique content like talk shows and comedy routines.
Thus, the driver of SiriusXM’s growth is the company’s ability to attract/acquire unique content assets that you wouldn’t find on other streaming platforms. Over the past several months, SiriusXM has actually accelerated its buildout of this content war chest. The company has created two new channels for college sports with Big 12 Radio and Big 10 Radio. They have also extended their deal with the PGA for five more years, recently launched a weekly talk show with PGA and partnered up with Netflix to launch stand-up comedy shows.
In other words, SiriusXM continues to morph into the most unique audio broadcasting platform in the world. Perhaps this is why search interest trends related to SiriusXM have been favorable for the past several years, and remain favorable today.
As such, revenue and sub numbers should be strong in the Q3 print. More importantly, management should sound a positive tone about margins. Recently, margins have been the one thing really holding SIRI stock back from super-charged growth. Margins have been under pressure from rising music royalty rates. But, the Music Modernization Act was just passed, and that act holds royalty rates steady at 15.5% for the next several years. Thus, margins should be, at worst, steady over the next several years.
Overall, from subs to revenues to margins, SiriusXM’s third-quarter report should impress investors. Given where SIRI stock trades today, an impressive report could spark a sizable rally.
The Stock Could Pop
In my experience, strong numbers against the backdrop of a depressed stock normally lead to a rally.
That is exactly what you have with SIRI stock. The numbers should be good. Meanwhile, across all important valuation metrics, SIRI stock trades at a discount to its historical valuation. It trades at a below normal price-sales multiple, price-earnings multiple, forward earnings multiple, trailing cash flow multiple and trailing EBITDA multiple.
Recent share price performance reflects these depressed multiples. SIRI stock has dropped more than 20% off recent highs. It now trades 10% below its 200-day moving average. That is about as far below the 200-day moving average as SIRI stock has been since 2010.
In totality, SIRI stock is depressed heading into the Q3 print. But, the numbers should be pretty good, and pretty good numbers could cause this depressed stock to pop.
Bottom Line on SIRI Stock
This stock has been a long-term winner. Barring a significant black swan event which knocks markets off course, SIRI stock will remain a long-term winner for the foreseeable future. The market seems to have lost sight of SIRI’s long-term value, but should be reminded of it in the Q3 earnings reports.
As of this writing, Luke Lango was long SIRI and NFLX.