American satellite radio leader Sirius XM (NASDAQ:SIRI) had put together a pretty solid five years of growth. Up until the novel coronavirus pandemic hit, that is. Starting in February, SIRI stock went off a cliff, with shares losing 40% of their value in just four weeks. Since hitting a four-year low of $4.44 in late March, SIRI has begun to claw its way back — but it’s been a rocky road. Now trading at $5.87, it remains well under its 2020 high close of $7.34, which makes the stock an interesting proposition for those willing to take on some risk.
This C-rated stock has real potential to at least regain the levels it traded at in February. With that alone representing 25% upside, it’s worth looking at what the future looks like for SiriusXM. But again, before we go further, keep in mind that the prospects here are more risky than those with the A-rated stocks I usually focus on.
The Impact of the Pandemic on SiriusXM’s Business
On April 28, with SIRI stock at $5.76, Sirius XM released its first-quarter earnings.
The company performed better than had been expected, noting: “The COVID-19 pandemic did not have a material effect on our revenue and expenses during the quarter ended March 31, 2020.”
Revenue was up 12% year over year to $1.95 billion. Profit of $293 million and earnings of 7 cents per share were also up significantly from last year’s $162 million and 3 cents per share. Furthermore, “SiriusXM added approximately 69,000 net new self-pay subscribers in the first quarter,” while the company’s Pandora streaming music service added 51,000 new self-pay subscribers. The company repurchased $243 million in shares during the quarter, and paid out dividends of $59 million.
SiriusXM stock popped the next day, but quickly began a three-week slide. The problem is those positive numbers weren’t the full story. The pandemic was having an impact, and the company was concerned about how bad that could get going forward.
Among the warning signs, despite the 69,000 new SiriusXM subscribers, the satellite radio service actually lost a total of 143,000 subscribers for the quarter. The company withdrew its 2020 guidance, with some rather ominous statements about what might happen in the second quarter: “Auto sales, advertising and customer responses to marketing campaigns all fell swiftly in the second half of March.”
An Extended Recession Is Bad News for SiriusXM
SiriusXM faces several big challenges going forward, and both would be made worse if the current recession deepens.
SIRI stock is a consumer discretionary stock. It can rise and fall based largely on consumer demand. Over the past five years, that has been a big plus for SiriusXM investors. Prior to the start of the coronavirus crisis at the end of February, the stock had grown in value by 94% over the past five years. Consumers increasingly opted for a satellite radio subscription, especially in their vehicle.
A deep and lengthy recession will result in fewer new subscribers, and more existing customers cancelling their subscription. Satellite radio is a luxury, a discretionary expense. We saw the first signs of that with the net loss of 143,000 Sirius XM subscribers in the first quarter.
The second problem is new car sales. SiriusXM gets a big adoption boost by partnering with auto companies to provide a free trial to its service in new cars. Many of those new car buyers get hooked and end up paying for a subscription. But car companies are in trouble. Ford (NYSE:F) has seen its stock plummet and its debt downgraded to junk status.
If jittery consumers stop buying cars, SiriusXM loses a key entry point for signing up new subscribers.
Bottom Line on SIRI Stock
All of this sounds a bit negative, but I think we are looking at worst case scenarios. Remember, this is a profitable company, and one that has built a successful business model. Without a doubt, it is going to feel some pain — and I think you can see that reflected in the reluctance of SIRI stock to charge back to pre-pandemic levels. But in the long term, the current low price represents a buying opportunity.
SiriusXM has been through a punishing recession before, and the company has this message for worried investors: “Just as it was a little over a decade ago during the global financial crisis, SiriusXM’s subscriber-based business model is resilient. We do not know what the shape of a recovery from this current crisis will look like, however, we are confident that our business will continue to generate substantial positive free cash flow.”
With all of that said, there’s room for optimism, albeit extreme caution is undoubtedly warranted as this is not an A-rated stock.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
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