Sirius XM has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 6.2% to $23.56 per share while the index has gained 4.1%.
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Why Do We Think Sirius XM Will Underperform?
We don't have much confidence in Sirius XM. Here are three reasons why SIRI doesn't excite us and a stock we'd rather own.
1. Decline in Core Subscribers Points to Weak Demand
Revenue growth can be broken down into changes in price and volume (for companies like Sirius XM, our preferred volume metric is core subscribers). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Sirius XM’s core subscribers came in at 32.86 million in the latest quarter, and over the last two years, averaged 1.5% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Sirius XM might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability.
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Sirius XM, its EPS declined by 43.5% annually over the last five years while its revenue grew by 1.5%. This tells us the company became less profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Sirius XM’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
We see the value of companies helping consumers, but in the case of Sirius XM, we’re out. That said, the stock currently trades at 7.9× forward P/E (or $23.56 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. We’d suggest looking at a top digital advertising platform riding the creator economy.
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