Shares of Sirius XM Holdings(NASDAQ: SIRI) are down a disappointing 56% in 2024, but it probably isn't time to turn our backs on the satellite radio provider.
Improving subscriber trends recently inspired Guggenheim analyst Curry Baker to upgrade the stock and raise its price target to $30 per share. Baker gave Sirius XM a buy rating, and the new target implies a gain of about 24% from recent prices.
Wall Street analysts are bullish for Sirius XM, but that doesn't necessarily mean it's a good stock to buy now. Let's weigh this company's advantages against some challenges it faces to see if following the latest Wall Street recommendation makes sense.
Reasons to buy Sirius XM stock
Sirius XM is the only satellite radio operator in North America. There are exceptions from automakers such as Honda and Rivian, but just about every new car sold in the U.S. and Canada comes with a Sirius XM satellite radio receiver and a free trial.
At the end of the second quarter, Sirius XM had 33 million subscribers, plus another 7.4 million potential subscribers in its trial funnel. This was fewer than it had a year earlier, but at least we know folks aren't going to leave for another satellite radio service.
In addition to its flagship satellite radio service, Sirius XM owns the Pandora streaming service. At the end of June, Pandora had 6 million paid subscribers.
Sirius XM's business is strongly profitable. Management expects to generate about $1 billion in free cash flow this year.
The company isn't shy about sharing its profits with investors. The stock's price is way down this year, but its dividend hasn't decreased. At recent prices, the stock offers a big 4.6% dividend yield. In addition to quarterly dividend payments, investors can look forward to upcoming stock buybacks.
Sirius XM recently completed a split-off and merger with Liberty Media that will simplify its equity structure. Following the merger, the Sirius XM board of directors announced a $1.17 billion stock buyback plan. At recent prices, that's enough to reduce its outstanding share count by about 15%, which could make it a lot easier to keep raising its quarterly payout.
Reasons to remain cautious
Now that just about everyone has a 5G-enabled smartphone in their pocket, satellite radio solves a problem that doesn't exist anymore. If you're interested in music, the ad-supported version of Spotify(NYSE: SPOT) is an arguably better option that doesn't cost a dime. Plus, most Americans have an Amazon Prime subscription which comes with ad-free access to 100 million songs.
Sirius XM subscribers seem most interested in talk radio, but this genre is steadily losing ground to podcasts that listeners can download and consume at leisure. Demand for satellite radio isn't about to disappear overnight, but it is declining steadily. In the second quarter of 2024, the number of self-pay Sirius XM subscribers decreased by 100,000 year over year.
SIRI Revenue (TTM) data by YCharts
Second-quarter Pandora revenue increased slightly, but Sirius XM sales declined 5% year over year and dragged total revenue lower. This isn't a recent trend, either. Trailing-12-month revenue has been declining, albeit slowly, since 2022.
Slightly declining sales are extra troubling because Sirius XM has a lot of debt to service. Interest expenses in the first half of 2024 came in at $206 million, or about 22% of operating income. If subscription losses decline faster than they have been, completing planned stock repurchases and raising the dividend could become much more challenging.
A buy now?
It isn't a preference I understand, but I can't deny that plenty of folks adore satellite radio. Since Sirius XM is the just about only provider, the pace of declining subscriptions we've seen over the past couple of years could remain manageable.
While there are plenty of reasons to expect relatively steady profits from Sirius XM, it isn't a stock I'd buy right now. I'm holding off because I expect satellite radio demand to decline at an increasing rate in the years ahead. That's because competing entertainment options, including Spotify, have more resources now than they did a few years ago.
In the second quarter, Spotify's subscriber base grew 12% year over year to 246 million. That's about 210 million more than Sirius XM. In other words, the international streaming giant has heaps more firepower to compete effectively against Sirius XM and Pandora in North America. With this in mind, Sirius XM is not a stock I'd currently consider buying.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Cory Renauer has positions in Amazon and Spotify Technology. The Motley Fool has positions in and recommends Amazon and Spotify Technology. The Motley Fool has a disclosure policy.
