It's been exactly a month since I wrote about three reasonsSirius XM Holdings(NASDAQ: SIRI) could bounce back in June. The country's lone satellite radio provider is living up to that potential. The shares have soared 36% in that time, easily beating the market.
This happiness hasn't been the default setting for Sirius XM investors. The stock continues to be a laggard in 2024, down more than a third since the beginning of the year. Things could be different now that it has a whiff of optimism. Let's go into some of the reasons the second half of this year can be more like the past month than the last six months.
1. A rare good reverse split is coming
Sirius XM expects to execute a 1-for-10 reverse stock split this quarter. Unlike the typically well-received forward stock splits, the market doesn't like when a company goes the other way. However, replacing every 10 shares of Sirius XM for a new share initially valued at 10 times the previous value makes sense here.
Sirius XM is in the process of combining with its Liberty Sirius XM Group(NASDAQ: LSXMA)(NASDAQ: LSXMB)(NASDAQ: LSXMK) tracking stock. The combination is long overdue, as Sirius XM's majority stakeholder has seen its tracking shares historically trade at a discount to the more widely traded common shares.
The transaction is expected to close at some point in the third quarter, which began earlier this week. The move will lift the confusion that investors sometimes have in sizing up the various flavors of the satrad company. Another benefit to the transaction is that it will transform Sirius XM from being a penny stock that is a hotbed for speculators to one that institutional investors cam take more seriously.
Image source: Getty Images.
2. Sizing up a bargain
Sirius XM has bounced off the 11-year low it hit early last month, but the stock is still cheap. Even after the surge over the past month, you can stake your claim in Sirius XM for less than 11 times trailing earnings. You're also getting Sirius XM for 11 times the $1.2 billion in free cash flow it expects to generate this year.
A reality check is always in order for stocks trading at reasonable multiples in an otherwise inflated market. Sirius XM has been posting single-digit percentage organic revenue growth for nearly a decade. Revenue even declined last year -- a 0.6% dip -- but it has been marginally positive in back-to-back quarters.
3. The dividend is attractive
The stock's atypical pop over the last four weeks has been the fruit of much high-fivery, but it has eaten away at the stock's yield. Sirius XM was yielding nearly 4.5% at its low point last month. It's now 3%.
Stay with me. Sirius XM has been shelling out a quarterly distribution since 2016. Despite the meandering top-line growth, it's been able to boost the payout every year, nearly tripling since the initial declaration. Will it increase its dividend again later this year? Either way, Sirius XM's quarterly disbursements will start looking a lot more attractive once the Federal Reserve starts lowering rates.
4. Fundamentals can get better
Sirius XM has a huge reach, but that wingspan seems to have stalled with its 33 million total subscribers. Reports of Sirius XM's death have survived recessions, a pandemic that had people using their cars less, and even the golden age of connected vehicles.
What can get Sirius XM growing again? Companies are calling employees back to in-office work, and that's obviously a positive for live satellite radio. A strong summer for road trips also plays into the appeal of Sirius XM's platform. AAA is forecasting a 5% increase in travel this week for the Independence Day holiday from last year, and a 10% jump from the pre-pandemic year of 2019.
5. Higher prices could deliver higher stock prices
Streaming bellwether Spotify(NYSE: SPOT) turned heads last month by increasing prices for its service by $1 to $3 a month. It remains to be seen if Sirius XM uses this as an opportunity to bump its monthly rates higher for the first time in 16 months, but it's a win-win situation for the media stock.
Unlike the largely music streaming platforms, Sirius XM's model is more scalable. It leans on its massive user base to secure proprietary content that doesn't have the same associated music licensing fees that can eat away at margins. It's original. It's a monopoly. If folks are willing to pay a little more for audio entertainment, then Sirius XM will make a lot more on the bottom line. It's time to pump up the volume.
Should you invest $1,000 in Sirius XM right now?
Before you buy stock in Sirius XM, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Sirius XM wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $786,046!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of July 2, 2024
Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Spotify Technology. The Motley Fool has a disclosure policy.
