While the markets have been in the bull mode, the shares of satellite-radio operator Sirius XM Holdings (NASDAQ:SIRI) have been left on the sidelines. Since last summer, the SIRI stock price has gone from a June high of $7.64 to $6.12 yesterday.
Previously, SIRI stock had been a fairly reliable performer, posting solid returns over the preceding five years, the average annual gain was nearly 17%.
So is this drop-off just a temporary thing? Or perhaps there is something more serious wrong with SIRI stock? Well, first of all, there are certainly some notable advantages on the bull side of things.
If anything, the $3.5 billion acquisition of Pandora looks spot on. The result is that SIRI now has a base north of 100 million listeners in the U.S. The deal will also lead to meaningful cost reductions of more than $50 million a year. Needless to say, there are redundancies across both organizations.
Something else: There will be lots of synergies. Pandora’s core AI (artificial intelligence) systems could mean better experiences from the Sirius platform. At the same time, there could be additional curated and premium content for Pandora. It really does look like a win-win.
In the meantime, Sirius has been continuing to get traction with its distribution partnerships, evident in its recent deal with Toyota Motor (NYSE:TM). The parties have agreed to a 10-year arrangement to make SiriusXM standard on all of the car maker’s vehicles in the U.S. This is certainly a big-time validation and the deal will mean that SIRI will have more than 80% penetration in the U.S. by next year.
What’s more, there have been other notable deals with General Motors (NYSE:GM) and Nissan.
The Issues With SIRI Stock
In a word, the problem with SIRI stock is … growth. According to the company’s projections, the revenues are expected to increase by only about 5% for the current year. The EBITDA is also expected to improve marginally.
There are several reasons for this. For example, the U.S. market is becoming saturated. There is also the issue of slowing auto sales. Keep in mind that the National Automobile Dealers Association has put out an estimate for sales to fall below 17 million vehicles this year.
But there are also some negative secular trends. Let’s face it, the emergence of ride-sharing services like Uber and Lyft (NASDAQ:LYFT) have started to change people’s views about driving. Over the past few years, younger people aren’t so quick to get a driver’s license, according to a post in the Wall Street Journal. It also does not help that the average price of automobiles has been increasing, primarily because automakers have been focusing on trucks and SUVs.
Bottom Line on Sirius XM Stock
To be sure, Sirius management has been shareholder friendly. Last year, the company distributed about $1.5 billion through Sirius satellite radio stock buybacks and dividend payouts. In fact, management has boosted its buyback authorization by $2 billion.
But this may not be enough — enough, that is, to get Sirius XM stock back into gear. Note that the valuation is far from cheap, especially when compared to the mediocre growth rate. The forward price-to-earnings multiple is at about 23x. The dividend yield is also at a paltry 0.8%.
Even Wall Street analysts are tepid. So all in all, it’s probably best to hold off on SIRI stock for now.
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.