The satellite radio provider is up 45% since bottoming out last month. There is still more potential upside.
One of this year’s biggest laggards is showing signs of life this summer. Shares of Sirius XM Holdings (SIRI -3.11%) have soared 45% since bottoming out in June. It’s a big jump for any stock, but the satellite radio provider is still trading 35% lower so far in 2024.
The stock has been on the move lately. It’s going to be even more volatile this week. Sirius XM reports its second-quarter results on Thursday morning. Growth has been hard to come by for the media giant over the past couple of years, but with its low valuation and attractive dividend yield it might not take much to keep the rally going.
Expectations are low
Analysts aren’t holding out for much when Sirius XM reports fresh financials before the market opens for trading on Thursday. They see revenue of $2.2 billion for the three months ending in June, a 2% decline from the $2.25 billion it posted a year earlier. Wall Street pros see a profit of $0.08 a share, flat with where it landed in last year’s second quarter.
Top-line growth has been uninspiring for some time. Organic revenue gains have been in the single digits on a percentage basis for nine consecutive years, once you back out the non-organic lift provided by the Pandora acquisition in 2019. Last year was the first top-line dip for Sirius XM. It may not be the last.
Subscriber growth has stalled near its current audience of 33 million total subscribers. Getting back to its pre-pandemic peak when listener accounts approached 35 million isn’t a sure thing. The platform is primarily consumed in cars and trucks, but it’s too easy to stream cheaper smartphone apps from newer vehicles. There’s also the fear that younger tech-savvy drivers aren’t as wowed by the prospect of coast-to-coast access to satellite radio.
Image source: Getty Images.
The ceiling is still high
Lost in the bearish narrative is that there are other levers for potential improvement at Sirius XM. Raising prices after a historically sizable sequential dip in subscribers in the first quarter isn’t a good look, but rival ear magnets are helping make the case for Sirius XM. Leading streaming app Spotify Technology turned heads last month by increasing prices for its service by $1 to $3 a month starting this month. Prices for the Spotify plans are now 20% to 30% more expensive than they were at the start of last summer after back-to-back summertime hikes.
There’s also advertising. It’s a small part of the revenue mix for Sirius XM, but it reaches a desirable audience of folks on the go with enough discretionary income to spring for satellite radio subscriptions. As the overall ad market improves so should Sirius XM’s opportunity here.
There is also another catalyst that is now just weeks away from being realized. Sirius XM has a unique situation dating back to when media mogul John Malone tossed out a financial lifeline when the satellite radio provider was facing potential bankruptcy as regulators dragged their feet in approving the combination of Sirius with XM to form a niche monopoly. Malone’s empire walked away with a sizable stake in the company, and it continues to trade as Liberty Sirius XM Group (LSXMA -1.56%) (LSXMB 0.64%) (LSXMK -1.65%) tracking stock in various flavors.
Those days are about to end. Liberty Sirius XM shareholders will vote on Aug. 23 to combine with the common stock it’s tracking. The transaction is tentatively set to finalize on Sept. 9. It should happen. Liberty Sirius XM has always traded for less than its value in the satellite radio giant. The gap has been narrowing in anticipation of the deal, as Liberty Sirius XM’s year-to-date slide of 20% is a lot less than the drop in Sirius XM itself. However, with the tracking stock still trading at a discount of roughly 20% you can see why Malone’s camp wants to seal the deal next month.
What will happen to Sirius XM after the transaction — post Malone, if you will? Sirius XM will execute a 1-for-10 reverse stock split in the process. Unlike so many failed reverse splits, this one should be greeted warmly by the market. Sirius XM is a profitable entity trading for 10 times earnings and yielding 3%. Losing the stigma of its penny stock pricing will encourage more institutional investors to come along for the ride.
There are legitimate long-term concerns for the media stock, but the near-term catalysts are promising. Short interest is even starting to inch higher in the last three months, opening the door for a potential short squeeze if Sirius XM makes a convincing bullish argument in its earnings call this week.
Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Spotify Technology. The Motley Fool has a disclosure policy.