This leader in digital audio is testing the market’s patience.
Sirius XM Holdings (SIRI) investors have struggled to lock onto a signal from the satellite radio giant. The stock is down 55% this year amid disappointing results with concerns about whether the company can manage to move the dial toward stronger growth.
The good news is that the company remains a category leader with an audience of over 150 million listeners across its platforms. The potential that Sirius XM finally gets its strategy right highlights the attraction of the stock with a significant opportunity to monetize next-generation audio formats.
Let’s discuss what investors should do with Sirius XM stock now.
The case to sell Sirius XM stock now
The way people consume media has rapidly changed in the past two decades. Unfortunately for Sirius XM, the company has been on the wrong side of the audio revolution as satellite radio largely fell behind the rise of streaming-music alternatives.
Recognizing the advantages of a satellite broadcast, particularly compared to terrestrial radio, the technology appears redundant next to the proliferation of broadband-mobile internet. It’s been a tough sell for Sirius XM to convert listeners with its premium price point when most people are already connected to the internet via their smartphone device offering access to multiple audio options.
Despite partnering with global-auto manufacturers to feature Sirius XM as an in-vehicle audio option, the company’s flagship radio service has been in decline for the last several years. Compared to a record 34.91 million subscribers in 2019, the company last reported 33 million paying users in the second quarter, down 100,000 in the past year.
The trends from the smaller-streaming Pandora segment and other off-platform services haven’t been any better. The 6 million paid Pandora subscribers this past quarter was down by 41,000 from a year ago.
Similarly, financials have struggled. Q2 revenue declined by 3% year over year, while adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) were flat compared to 2023. For the full year, the company expects revenue to decline by around 2% with an adjusted EBITDA target for 2024 at $2.75 billion, down 3.2%. These dynamics help explain the fundamental challenges the company faces. Investors skeptical that Sirius XM can orchestrate a turnaround have plenty of reasons to sell the stock.
Image source: Getty Images.
The case to buy Sirius XM stock
It’s easy to get caught up in the poor headlines, but it’s also important to consider the strong points of any outlook. Beyond the soft operating trends, Sirius XM remains profitable and generates significant free cash flow, expected to be around $1.2 billion this year.
The plan is to reduce the balance sheet debt position and invest toward growth. On Sep. 9, Sirius XM completed its split-off and merger transaction with Liberty Media which included a 1-for-10 reverse split. This means that shareholders of the stock received one new share for every 10 shares they owned.
The deal, announced last year, simplifies the equity structure and should provide the now independent Sirus XM Holdings Group more strategic flexibility that can hopefully translate into improved shareholder returns. The stock yields 4% through a quarterly dividend that management intends to maintain.
The business isn’t growing as expected, but there is a sense of stability supported by a loyal listener base. Instead of attempting to compete with larger players like Spotify Technology for on-demand music streaming, Sirius XM differentiates itself with more curated content that is now available on a stand-alone mobile app separate from the in-vehicle satellite-radio product. The company is betting on a younger demographic growth audience seen as more willing to spend on multiple services.
The bullish case for the stock starts with the company’s ability to expand advertising opportunities from its high-profile podcasts along with exclusive live sports broadcasting. With shares of Sirius XM trading at a forward price-to-earnings (P/E) ratio of 8, investors who are confident there are better days ahead can consider buying the stock at what appears to be a bargain level.
Decision time for Sirius XM stock
My prediction is that the number of uncertainties surrounding Sirius XM will keep shares volatile. With the stock already losing more than half its value this year, it’s probably too late to sell since many of the negatives are already priced in. The big risk is if conditions deteriorate further. At the same time, it will likely take evidence sales and accelerating subscriber trends for the stock to sustain a big rally. I believe a hold rating makes sense for current shareholders while investors on the sidelines should avoid it for now.
Dan Victor 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.