It hasn’t been fun owning Sirius XM‘s (SIRI 1.50%) stock lately. In the last three years, the shares have lost more than 53%. Over that span, the S&P 500 gained 29%.
People were once drawn to the service and the company grew quickly. However, recently there has been sluggish revenue growth. The key question for long-term investors is, how can Sirius XM accelerate top-line growth and profitability? Or, are the company’s best days behind it?
The answer lies in understanding the business. Let’s take a look to see if management can turn things around.
Image source: Getty Images.
Lots of competition
The company operates two businesses: Sirius XM and Pandora/off-platform. Both provide content, but their primary revenue sources differ. Hence, it’s important to understand each one.
Sirius XM provides a wide range of radio content. This includes music, sports, talk, entertainment, and news programming. It generates most of its revenue via subscriptions. Last year, the division accounted for 76% of the company’s revenue.
Pandora offers listeners the ability to create personalized playlists. They can play music whenever they want on smartphones or the internet. The majority of its revenue comes from advertising.
However, both businesses face intense competition from a variety of sources, including traditional radio, which provides free content, and streaming services. These services include Amazon Prime, Apple Music, Spotify Technologies, and Alphabet‘s YouTube.
Sluggish growth
The Sirius XM business has struggled to generate top-line growth. Last year, the Sirius XM segment had a 1% revenue drop, and that was the same decline in the first quarter.
The number of self-paid subscribers dropped 2% to 33.4 million and paid promotional subscribers (automakers offering paid subscriptions for a time) fell 7% to 1.8 million.
Management expects the slide to continue with fewer subscribers and a drop in the price paid. Certainly, that’s not a good combination for Sirius XM’s main business.
It anticipates companywide revenue of $8.75 billion this year. That represents a drop of more than 2% from 2023.
Potential headwind
The Pandora business has been performing fairly well. In the first quarter, revenue increased 7% to $495 million.
Management expects advertising revenue to continue increasing. However, there were fewer subscribers, which could pressure the unit’s core advertising down the line.
No one can predict with certainty what the economy will do, but there have been signs of it slowing. Should economic growth slow significantly, overall advertising spending will undoubtedly be negatively affected. That would likely hurt Pandora’s revenue.
What to do?
Sirius XM’s shares sell at about half the price-to-earnings (P/E) ratio compared to a year ago. The stock has around a 9 P/E multiple, much lower than the S&P 500’s 28.
That may seem tempting for value investors. However, with intense competition and the main business’s revenue falling, I’d avoid the stock or sell if you already own it.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, and Spotify Technology. The Motley Fool has a disclosure policy.