Shares of Sirius XM (NASDAQ:SIRI) steadily gained ground throughout the entire 2010s, with Sirius XM stock rising from $0.50 at the start of the decade, to $7 by the end of the decade, as the audio entertainment giant leveraged steady and healthy user growth trends to drive equally steady and healthy revenue, margin, and profit gains.
But, the music may stop playing for SIRI soon.
That is, Sirius XM’s user growth trends are meaningfully slowing. So are the subscriber trends over at Pandora, which Sirius XM recently acquired. Current audio marketplace dynamics imply that these slowdowns will persist for the next few years. As they do, revenue growth, margin expansion, and profit growth will all slow at Sirius XM.
Put simply, SIRI stock — which trades at near record high valuation levels — isn’t priced for this slowdown. Thus, as the slowdown commences over the next few years, upside in SIRI stock will be limited by a valuation that doesn’t fully account for this.
Growth Is Slowing for Sirius XM
Growth trends at Sirius XM and Pandora are rapidly slowing, and current audio marketplace dynamics imply that they will continue to slow for the foreseeable future.
Subscriber growth rates at Sirius XM have slowed from 4-5% in 2018, to 2-3% in 2019, while Pandora continues to shed millions of listeners each quarter. Worse yet, Pandora’s paid subscription service (which has long been a source of big growth) appears to have peaked in 2018, and is now on a declining sub base trajectory.
In other words, user and subscriber growth trends at both Sirius XM and Pandora are materially slowing. They won’t rebound anytime soon.
Both the free and paid audio marketplaces are extremely competitive, and the likes of Spotify (NYSE:SPOT), Apple (NASDAQ:AAPL), and Amazon (NASDAQ:AMZN) are all more aggressively expanding their content portfolios with podcasts and original content. As they continue to do so over the next several years, they will erode the value props of both Sirius XM and Pandora, thereby limiting how many users actually engage with those platforms.
This is a big problem. As goes sub growth, so goes all of Sirius XM. Slowing sub growth will result in slowing revenue growth, but won’t have much impact on expense growth.
So, revenue growth rates will slow going forward. Expense growth rates won’t. That means that the current pace of profit margin expansion will slow, too. Slower revenue growth plus slower margin expansion equals materially slower profit growth.
Slower profit growth usually means slower gains in a stock. With respect to SIRI stock, this is exactly what will happen.
Upside in Sirius XM Stock Is Limited
The problem with Sirius XM stock is that it’s priced for the good times to keep rolling. But, the good times will start slowing, and this divergence will ultimately limit further upside in SIRI stock.
Consider that Sirius XM projects as just a low-to-mid single digit revenue growth company over the next few years, driven by low single digit sub growth and low single digit gains in average revenue per user.
Also, consider that expenses will likely continue to rise a fairly steady low single digit rate going forward to support platform expansion, which on top of low-to-mid single digit revenue growth, implies mild upside margin drivers.
Combining those two realities, Sirius XM reasonably projects as a high single digit profit grower going forward.
Now, consider that SIRI stock trades at a whopping 30-times forward earnings multiple for that high single digit profit growth. For comparison purposes, that’s a bigger forward multiple than the forward multiples at Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOG), two companies which project as 15%-plus profit growers over the next few years.
Does that big of a multiple make sense for a small audio entertainment company with a ton of competition and slowing growth trends? No. It doesn’t. As such, going forward, valuation risks will likely short-circuit the decade-long rally in SIRI stock.
Bottom Line on Sirius XM Stock
SIRI stock had a great decade in the 2010s, but it likely won’t repeat on that big success in the 2020s. Instead, in this decade, slowing growth trends and valuation risks will likely weigh on SIRI stock.
As of this writing, Luke Lango was long AAPL and FB.
