For the better part of the past decade, shares of Sirius XM (NASDAQ:SIRI) have been on a steady uptrend. Long story short, SIRI stock went from under $1 in early 2010 to $7 by mid-2018, as the satellite-radio giant consistently grew its subscriber base, revenues, margins, and profits.
Source: Vinod Sankar via Flickr
But that growth trajectory slowed in late 2018, causing SIRI stock to stop rising . As of this writing, SIRI stock is 20% off its all-time highs, and the shares have been on a downtrend for the past eight months.
Unfortunately, things may not get better anytime soon for Sirius XM stock. The reality is that, while Sirius has staying power in the music-broadcasting industry, the company’s growth is slowing on every front. Its subscriber growth, revenue growth, and average revenue per user (ARPU) growth are all slowing. And after expanding for several years, its margins are going in the opposite direction. Finally, the growth of its bottom line has flattened.
In other words, slowing growth is a major problem for Sirius and for SIRI stock, which will likely remain stuck in a downtrend until the company’s growth accelerates.
Sirius’ Growth Outlook Is Slowing
Although there has been a massive shift towards music-streaming services like Spotify (NYSE:SPOT), demand for Sirius radio has remained robust, due to the company’s unique content and delivery method. As a result, Sirius XM has actually been able to grow alongside streaming music services like Spotify, adding roughly 1.7 million subscribers per year over the past five years.
Meanwhile, because consumers see the value of Sirius XM Radio, the company hasn’t been forced to cut prices to drive growth. Instead, its ARPU has actually grown, rising at an average pace of roughly 2.5% per year over the past eight years. Simultaneous sub and ARPU growth have led to healthy revenue growth over the past several years for SIRI. That has been accompanied by robust margin expansion, a combination which has led to healthy profit growth.
But all of those positive trends slowed in 2018. The company’s subscriber growth slowed. Its ARPU growth was flat, and its margins actually dropped, leading to relatively muted profit growth. Meanwhile, all of these metrics are expected to weaken next year. Sub growth is expected to slow further, while revenue growth is expected to drop and its margins are expected to decline more. Finally, its EBITDA, excluding certain items, is expected to barely move higher.
Clearly, Sirius’ growth outlook is slowing. Under the hood, the company is probably starting to rub elbows with the likes of Spotify, YouTube, and others, the sum of whom will ultimately put a cap on how big Sirius’ sub base gets. It looks like that cap is rapidly approaching. Also, its margins are maxed out. Music-royalty fees are going up, and they will likely go up forever in spaced-out increments, meaning SIRI’s EBITDA margins are most likely maxed out near 40%.
Overall, the era of sustained, robust user, revenue, and profit growth is over for SIRI. Going forward, all three metrics will head higher, but at a slower rate than what we’ve seen over the past several years.
Sirius XM Stock Is Fully Valued
Given Sirius’ slowing growth prospects, SIRI stock is fully valued here and now.
Its revenue is expected to rise just under 6% next year, while its margins are expected to drop and it has estimated that its EBITDA will rise by less than 3%. Moreover, the company’s revenue growth should continue to slow over the next several years as its subscriber base peaks.
The company’s margins should rebound once the most recent increase in its music-royalty fee phases out. But that headwind will come back in a few years, ultimately keeping its adjusted EBITDA margin expansion tepid.
That combination of slow revenue growth and tepid margin expansion should drive mild profit growth, excluding the company’s acquisition of Pandora. Thus, SIRI could be looking at EPS of 50 cents by fiscal 2025. Based on a forward multiple of 20, which is average for growing companies, that equates to a $10 price target for SIRI stock by fiscal 2024. Discounted back by 10% per year, that implies a fiscal 2019 price target for Sirius XM stock of just over $6.
That is roughly where SIRI trades today, implying limited upside over the next several months.
The Bottom Line on SIRI Stock
Sirius is a good company with healthy, long-term growth prospects. But the company’s growth is slowing, and slowing growth will ultimately prevent SIRI stock from rising much above its current levels. So until current the company’s slowing growth trends reverse course or the stock’s valuation compresses meaningfully, it’s best to avoid SIRI stock.
As of this writing, Luke Lango was long SPOT.
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