Where will Sirius XM stock be in 5 years?

With shares down about 60% over the past five years, Sirius XM (NASDAQ: SIRI) it beat its long-term investors. And not surprisingly, management called for a 1-for-10 reverse stock split to keep the stock from getting too cheap. But while the breakup takes Sirius out penny stock territoryit doesn’t solve the challenges that put it there in the first place. Let’s dig deeper to see what the next five years could bring.

A legal monopoly without a moat

Formed through the 2008 merger of Sirius Satellite Radio and XM Satellite Radio, Sirus XM demonstrates the fascinating nuances of American antitrust law. At face value, the combined company is a monopoly. However, the Federal Communications Commission (FCC) approved the merger, agreeing that the deal would not hurt consumers due to the growing abundance of choices in the audio entertainment space.

In hindsight, the FCC’s decision was correct. Sirius XM is the only satellite radio provider available in the US, but is unable to raise prices for consumers due to stiff competition from terrestrial radio stations and relatively new rivals such as Apple Car Play, which allows users to connect their smartphones (full of music and podcast libraries) to their cars.

In the past, Sirius strengthened his economic moat with exclusive content such as The Howard Stern Show. But while it may be too early to call him a “shock jock” influencer, his relevance has paled in comparison to a new generation of podcasters like Joe Rogan and Tucker Carlson, who rank first and second on Spotifyhis audience ratings. On that note, the Spotify app also works with Apple Car Play, making it a direct competitor to Sirius.

Poor business momentum

Sirius XM is a relatively mature company in a low-growth industry, which shows in its second-quarter earnings. Total revenue down 3.2% year after year to $2.18 billion, but operating income rose 5.4% to $505 million due to lower expenses such as office wages and development. Perhaps the main appeal for Sirius investors is its healthy bottom line.

The company reports free cash flow of $343 million and adjusted earnings before taxes on interest, depreciation and amortization (EBITDA) of USD 702 million. Management returns this money to investors through a 4.34% dividend and share buybacks — with $1.17 billion authorized in the second quarter. Between 2012 and 2022, Sirus bought back 3,654 shares for $16.5 billion and shows no signs of stopping anytime soon.

Image source: Getty Images.

Many investors like buybacks because they reduce the amount of a company’s shares outstanding, giving each shareholder one bigger claim on current and future earnings. But spending has an opportunity cost. And the cash used to buy back Sirius’ stagnant stock could have been used to invest in long-term growth engines for the company.

Where will Sirius XM be in the next five years?

While Sirius isn’t a horrible stock, its next five years look to be just as weak as its last five years. While the satellite radio business remains a stable cash cow, there isn’t much opportunity for growth, especially with increasing competition from alternatives like Apple Car Play.

To make matters worseSirius’ leadership seems to have run out of ideas. Instead of investing in research or new business verticals, it is content to buy back its underperforming stocks, even though that money would likely enjoy a higher return in S&P 500. The benchmark has risen 87% over the past decade, while Sirius shares have fallen 60%. Investors can find a much better home for their capital.