Sirius XM Holdings Inc. (SIRI)
Is It Time to Be Tuned In on $SIRI?
In our Ledger Island Spotlights, we look at companies that could be a good fit in your portfolio or worth a closer look down the road. Some of them you have heard of. Some might be new finds. Either way, you’ll always get two retail investors’ perspectives from Clint & Phil. While they don’t always agree, they work to come to a middle-ground consensus on what to do moving forward and update guidance as we continue to track the stock on the Ledger Island Watchlists. Today, we’ll be looking at Sirius XM Holdings Inc. $SIRI.
Sirius XM Holdings Inc. (SIRI) is a LARGE-CAP company founded in 1990 (then just Sirius Radio) and began public trading on the Nasdaq in January February 2014. In their own words from Sirius XM’s corporate website:
“Sirius XM Holdings Inc. (NASDAQ: SIRI) is the leading audio entertainment company in North America. SiriusXM offers unique programming and content across the company’s subscription- and digital advertising-supported audio platforms. SiriusXM’s platforms collectively reach more than 150 million listeners across all categories of digital audio – music, sports, talk, and podcasts – the largest reach of any digital audio provider in North America.” https://www.siriusxm.com/corporate
Phil’s Take:
The last time I spotlighted a stock, I wrote about a cutting-edge business doing innovative R&D in the aerospace market. This week, I am focused on a company based in radio which was invented in 1900. All jokes aside, if you're like me, you mainly recognize Sirius XM as that radio service you get a free trial of when you buy a new car or that thing Howard Stern is on. In reality, Sirius XM has a much more diverse media portfolio that includes streaming service Pandora and claims 34 million paid subscribers and a monthly audience of 150 million listeners.
Accessing SIRI 0.00%↑ gets complicated because of Liberty Media's ownership stake in SIRI. John Malone controls Liberty Media and has assets that include Formula 1. At present, Liberty Media owns 84% of Sirius XM, and as part of that acquisition, they created a tracking stock, LSXMA 0.00%↑. A tracking stock is a common stock that the issuing company intends to reflect or "track" the economic performance of a particular business or "group" rather than the financial performance of the company as a whole. In this instance, it is tracking Liberty Media's SIRI ownership and not the entirety of Liberty Media.
In December, Liberty Media and Sirius XM announced that the tracking stock would merge with the SIRI 0.00%↑ stock to create what they are calling "New Sirius XM." This merger is expected to be completed early in the third quarter 2024. So now the question is, if you like Sirius XM as a company, do you invest in SIRI or the tracking stock? The fundamentals say that LSXMA 0.00%↑ is the better value. Its P/E ratio is lower, 11.84x, to SIRI's 16.5x. Its earnings per share is also higher, $3.21 to $0.33. LSXMA is the better value, but you don't have to take my word for it; Berkshire Hathaway owns roughly 70M shares of the Liberty tracking stock and bought 7M of that in January 2024. There is no such thing as a sure thing in stocks, but following Berkshire Hathaway's lead is a good strategy.
So, is SIRI 0.00%↑ a company worth investing in on its own? The numbers say maybe. Q3 revenue remained relatively flat compared to the same period in 2022. Still, net income was up relative to the previous year due to cost-cutting measures that saw general and administrative experiences decrease by 8% year over year. They had a record quarterly adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in Q3 and announced a 10% increase in their quarterly dividend. They did pause a strong share repurchase program until the Liberty Media process finishes, but their previous effort ($72 million in share repurchases in Q3) demonstrates a solid commitment to maintaining stock value.
The pressing issue for me is how much additional value SIRI 0.00%↑ can generate. Sirius XM lost 96,000 paid subscribers in the last quarter, and total subscribers have remained relatively flat at 34 million compared to the same period in 2022. If you view Sirius XM as a consumer cyclical, then a bounce back could be in the cards in 2024, but they are operating in an increasingly crowded space. According to C&R Research, an average American spends $219 monthly on subscription services. With the cost of living remaining high, it's unclear which streaming services will be able to retain subscriber loyalty.
Clint’s Take:
I am a Sirius XM customer. As Phil pointed out, I got an intro subscription when I bought my new car. I still have it two years later, mainly for NFL games audio broadcasts as I am out and about on game days. Some find canceling Sirius XM an arduous process, spawning a lawsuit brought to federal court by the NY Attorney General. SIRI 0.00%↑ also has had lawsuits brought by SoundExchange over royalty underpayment claims totaling $150M. Neither case makes SIRI a “bad investment,” but it is worth considering with a company with slowing revenues (+0.2% YoY 2023, missing the +0.42% expected).
On the more positive side, SIRI 0.00%↑ is taking a page from the Spotify SPOT 0.00%↑ playbook and acquiring exclusive programming to drive subscriber revenue, which declined in 2023 (0.3% down from Q3 2022). Recently, SIRI paid 100M to Jason Bateman, Sean Hayes, and Will Arnett to be the new home of their SmartLess podcast (big fan). SIRI has also given their phone and smart TV Apps a facelift to get you listening outside your car with digital-only plans available. My concern is if future big purchases and interface changes may overextend SIRI’s balance sheet, similar to what Disney DIS 0.00%↑ did in the early 2000s.
Liberty Media has no doubts about the future though. The creation of the tracking stock LSXMA has seen a +30.17% increase since August 2023, while SIRI only +6.42% over the same period. The exchange ratio of the “New Sirius XM” stock for SIRI 0.00%↑ holders will be 1:1 (possible price boost for owners when that time comes), but the LSXMA 0.00%↑ is looking closer at a $4.23 stock price divider (based on the SEC 13D), which is an 18.84% savings from SIRI’s $5.14 price of today (02/06/24). Now you can see why the tracker gets so much more investment. For the complete merger breakdown, see the press release link below:
I don’t know what to make of SIRI 0.00%↑ . By itself, it isn’t an awful company, and it is pretty fair-priced, considering it does offer a dividend. I start to run into trouble getting my mind around the idea that buying SIRI now is not as good a value as buying the tracking stock. If I already owned SIRI, I would definitely hold through the merger and see what happens. I think the new stock might see a short boost, and Liberty Media obviously won’t let the current SIRI price drop below the $4.23 mark, so there is that. As for a new position, I am not as convinced that the current price range or buying during any potential run-up will be as fruitful.
Moving Forward:
SIRI 0.00%↑ feels like a low-risk but low-growth stock to us. There is a reason that major investors are buying LSXMA 0.00%↑ rather than SIRI. Sirius XM has a stable business model, a solid gross margin (61% in Q3), and the potential for a bounce back like most consumer cyclicals. Still, the Liberty Media acquisition muddies the water of ROI (Return on Investment) of SIRI alone. Therefore, we are placing it on the "Backburner" watchlist until some details for the "New Sirius XM" stock become available. Of all the stocks we spotlighted, SIRI is the first one that currently pays a dividend (SIRI, not the tracking stock). While it's a low one, averaging a $0.026 quarterly, at least you'll earn some income while waiting to see if the investment pays off, but it is still unclear if that dividend continues after the merger. We would also like to see if SIRI continues to acquire more program exclusives (like the SmartLess podcast) or how Liberty Media properties further integrate into SIRI. In the meantime, the tracking stock, LSXMA 0.00%↑ , while more expensive and has no dividend, might be the better investment today if you are interested in owning SIRI 0.00%↑ .
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