Does Sirius XM Stock Look Promising At $6?

After a 32% rise since the March lows of this year, at the current price of around $6 per share, we believe satellite radio operator Sirius XM’s stock (NASDAQ: SIRI) has reached its near term potential. Sirius stock is down by around 18% year to date amid the ad sales fallout from the pandemic. Investors have been worried that a slowdown in car sales could lead to a drop in the company’s revenue and subscriptions, which are often included as options in new vehicles. But Sirius’ Subscriptions grew 3% year-over-year (y-o-y) in the recent Q2 and it generated 84% of its revenues from subscriptions, suggesting that the company is uniquely positioned among radio operators to survive a recession. In fact, the satellite radio company has also found ways of diversifying and boosting its growth through synergistic acquisitions into music and podcast management for long-term growth.

Sirius XM’s stock is already about 11% higher than it was at the end of 2017. Our dashboard, What Factors Drove 11% Change in Sirius XM Stock Between Fiscal 2017 and Now?, provides the key numbers behind our thinking, and we explain more below.

Some of this growth over the last 2 years is justified by the roughly 44% increase in Sirius XM’s revenues from $5.4 billion in 2017 to $7.8 billion in 2019. It should be noted that a 35% year-over-year revenue growth in 2019 was largely due to the acquisition of Pandora’s business. In addition, earnings growth, on a per-share basis, was higher by 43%. Despite acquisitions and stock option grants, Sirius XM has been able to reduce its share count by nearly 3% over the past two years, and that helped boost its expanding profitability on a per-share basis. However, its net margins contracted from 11.9% in 2017 to 11.7% to 2019, due to higher expenses related to the Pandora acquisition. Finally, Sirius XM’s P/E ratio declined about 5% from 38x at the end of 2017 to 36x at the end of 2019. The company’s P/E is now around 29x, and it could remain range-bound around current levels going forward.

So how has Coronavirus impacted the stock?

In the June-ended Q2, Sirius XM’s total revenue fell 5% year-over-year (y-o-y) in the quarter. Although it saw a 31% y-o-y decline in ad revenue (largely from its Pandora business), but reported a nearly 3% y-o-y increase in subscription revenue. EPS for the quarter remained constant at $0.06 per basic share because of lower costs and an aggressive stock buyback program. The company’s model has relatively fixed transmission expenses irrespective of the number of subscribers, which allows room for operating margin expansion going forward.

While Sirius XM enjoys a 77% new car penetration rate – as the majority of its revenues come from car-installed subscriptions, the company is also looking into growth through other forms of audio entertainment such as music and podcasts. In February, Sirius XM acquired a minority stake in the open audio platform SoundCloud. Sirius also acquired Simplecast, in June, a leading podcast management platform that allows creators to publish and analyze their content. This business synergizes well with Sirius’ ad tech subsidiary, AdsWizz, which is an end-to-end monetization solution for audio content. Then, in July, Sirius XM made an acquisition of podcasting behemoth Stitcher, which will add established podcasts like Freakonomics Radio, Oprah Winfrey’s SuperSoul Sunday, to name a few, to its platform. In total, Sirius’s 2020 acquisitions cost the company $428 million in total. The expectation is that the new podcasting trend will boost the company’s current revenue streams and possibly add new ones.

Going by our Sirius XM’s Valuation, with an EPS estimate of around 21 cents and P/E multiple of 30x in fiscal 2020, this translates into a price of $6, which is almost in line to the current market price. Moving forward, the company looks poised for long term growth because of its low valuation and acquisition-driven growth strategy.

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In addition, our dashboard forecasting US Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

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