Sirius XM (NASDAQ:SIRI) stock seems to be in a solid position at the moment. The company’s core product is attractive, as I can personally attest.
Source: Vinod Sankar via Flickr
I’m not alone; the company’s subscriber base continues to grow. Sirius has its costs under control, that’s one reason the company is expecting its profit growth to accelerate this year. And SIRI stock looks somewhat cheap, at least from one perspective: Sirius XM stock trades at about 17 times the company’s 2019 free cash flow guidance.
In a market where “cheap” stocks are hard to find, that might be enough to make SIRI stock attractive. Two well-known , successful investors did find Sirius stock alluring, John Malone’s Liberty Media owns 67% of Sirius, which is traded through tracking stocks, including Liberty Sirius XM Group Series A (NASDAQ:LSXMA). Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A,NYSE:BRK.B) owns another 3% of SIRI.
And SIRI stock is intriguing, particularly after its recent pullback. That said, the price of the shares doesn’t seem quite right. SIRI is facing risks, and its growth seems likely to slow starting in 2020. SIRI has a nice business and Sirius stock is trading at a decent price, but it would take a lower price to make the case for SIRI stock truly compelling.
SIRI Stock’s Valuation
All stocks primarily trade based on what the market believes will happen in the future.For Sirius stock, the bet seems reasonably simple. In an era in which content delivery is changing quickly and dramatically, will Sirius XM win or lose? If satellite delivery is a plus, and the company’s existing content creates a “moat” around its business, SIRI should rise. If streaming makes satellite radio obsolete – if Sirius XM is akin to a cable network facing the threat of Netflix (NASDAQ:NFLX) – it will fall.
At the moment, the market seems to be pricing in a split decision on those fronts, although the stock’s valuation is somewhat in the eye of the beholder. SIRI’s 2019 guidance for free cash flow of $1.6 billion suggests a price-free cash flow multiple of right around 17 times. That’s a reasonable figure, one that doesn’t price in much growth. And it’s likely inflated, if modestly, by last year’s acquisition of Pandora, which should hurt free cash flow this year, due to one-time costs and Pandora’s ongoing losses.
SIRI’s price-earnings multiples are a bit higher. Analysts’ average estimate for the company’s earnings per share this year is 22 cents. That suggests a more aggressive P/E multiple of 22. After adding some $7 billion of debt to the company’s market capitalization, 2019 guidance implies an EV/EBITDA multiple of about 15 times; that, too, isn’t cheap.
The Bet on Sirius XM Stock
Across all valuation metrics, SIRI stock is pricing in growth that’s similar to its recent performance. Sirius stock did slide after investors were apparently disappointed by SIRI’s Q1 results. But its paid subscribers rose 5% year-over-year, and its full-year guidance was maintained. Thanks to SIRI’s cost controls, its adjusted EBITDA climbed an impressive 27% with little, if any, help from Pandora,
That quarterly performance follows several years of growth in terms of subscribers, adjusted EBITDA , and margins. The low-20s P/E and mid-teens EV/EBITDA multiples currently assigned SIRI stock suggest that performance should continue going forward.
Why SIRI Can Rise
If Sirius XM can accelerate that growth, Siri stock should rise above its current levels. That seems like a possible scenario. Penetration of installed radios should rise going forward. On the Q1 earnings call, management targeted an 80% penetration rate in new cars by next year. Meanwhile, strong recent results from Ford (NYSE:F) and General Motors (NYSE:GM) ease some of the concerns that “peak auto” might lower Sirius XM’s customer-acquisition rates.
Used car penetration and take rates are rising as well, according to SIRI. Sirius XM radios are only installed in about 45% of cars at the moment; an increased installation rate should result in easier sales, more subscribers, and higher margins.
SIRI has other positive catalysts that can enable its growth to accelerate. Pandora offers the company an entry into the streaming business and cross-selling opportunities between the two platforms. Autonomous driving, down the line, could make video delivery a profitable venture. Sirius ‘apps provide it with exposure to growing smartphone usage as well.
The broad case for SIRI over the longer term is based on the idea that content needs are definitely going to rise. With Pandora, Sirius has more ways to meet those needs and a great deal of valuable content with which to do so. Given that investors are paying nosebleed valuations for content platform stocks like NFLX and Spotify Technology SA (NYSE:SPOT), SIRI stock isn’t expensive. In fact, from that perspective, it’s downright cheap.
The Risks Facing SIRI
Honestly, I’m not completely sold on those contentions, however. It still doesn’t look like Pandora is performing all that well: its active users declined 9% YoY in Q1, although its paid subscribers rose by the same amount. 5G may improve the listening experience offered by its streaming rivals.
And going forward, SIRI stock still probably is pricing in some acceleration of its growth. If Sirius’ status quo continues, SIRI stock will probably be reasonably stable; it may rise along with the market, but it probably won’t outperform. It will take another driver (no pun intended) just to get the stock back to its late 2018 levels above $7, and I’m not sure what that driver could be.
Pandora was a worthwhile gamble, but it hardly look likes a needle mover, and that company has never been profitable or close to it. Its core audio platform is well-known at this point; its subscriber count can grow, but its growth won’t necessarily be explosive.
SIRI stock, in short, looks reasonably priced for the rate at which it’s growing at the moment. Until that growth changes – for better or for worse – the Sirius XM stock price probably won’t change much, either.
As of this writing, Vince Martin has no positions in any securities mentioned.
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