Shares of Sirius XM could rise 24%, according to a Wall Street analyst. Is it a buy now?

Actions of Sirius XM Holdings (NASDAQ: SIRI) are down 56% in 2024, but it’s probably not 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 his 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 on Sirius XM, but that doesn’t necessarily mean it’s a good act to buy now. Let’s weigh this company’s advantages against some of the challenges it faces to see if following Wall Street’s latest advice makes sense.

Reasons to buy Sirius XM stock

Sirius XM is the only satellite radio operator in North America. There are exceptions from car manufacturers such as Honda and Rivianbut almost every new car sold in the US 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. It was less than a year ago, but at least we know people 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 very profitable. Management expects to generate about $1 billion in free cash flow this year.

The company is not shy about sharing its profits with investors. The share price has fallen a lot this year, but the dividend hasn’t. At recent prices, the stock offers a high dividend yield of 4.6%. In addition to quarterly dividend payments, investors can look forward to future share buybacks.

Sirius XM recently completed a spin-off and merger with Liberty Media that will simplify its capital structure. Following the merger, the Sirius XM board announced a $1.17 billion share buyback plan. At recent prices, that’s enough to reduce the number of shares outstanding by about 15%, which could make it much easier to raise its quarterly payouts further.

Reasons to remain cautious

Now that almost everyone has a 5G-enabled smartphone in their pocket, satellite radio solves a problem that no longer exists. If you’re interested in music, the ad-supported version Spotify (NYSE: SPOT) it’s an unquestionably better option that doesn’t cost a dime. In addition, most Americans have a Amazon Prime membership that comes with ad-free access to 100 million songs.

The story continues

Sirius XM subscribers seem most interested in talk radio, but the genre is steadily losing ground to podcasts that listeners can download and consume at their leisure. The demand for satellite radio is not going to disappear overnight, but it is steadily declining. In the second quarter of 2024, the number of Sirius XM autopay subscribers fell by 100,000 year-over-year.

Pandora’s second-quarter revenue rose slightly, but Sirius XM’s sales fell 5% year-over-year and reduced total revenue. This is not a recent trend either. Trailing 12-month revenue has declined, albeit slowly, since 2022.

The slight decline in sales is particularly concerning because Sirius XM has a lot of debt at work. Interest expense in the first half of 2024 amounted to $206 million, or approximately 22% of operating income. If subscription losses fall faster than they have been, completing planned share buybacks and increasing the dividend could become much more difficult.

A buy now?

It’s not a preference I understand, but I can’t deny that many people love satellite radio. Since Sirius XM is pretty much the only provider, the rate of decline in subscriptions we’ve seen over the past two years could remain manageable.

While there are plenty of reasons to expect relatively steady returns from Sirius XM, it’s not a stock I’d buy right now. I do because I expect the demand for satellite radio to decline at an ever-increasing rate in the coming years. That’s because competing entertainment options, including Spotify, now have more resources 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 much more firepower to compete effectively against Sirius XM and Pandora in North America. With that in mind, Sirius XM is not a stock I would currently consider.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. 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.

Shares of Sirius XM could rise 24%, according to a Wall Street analyst. Is it a buy now? was originally published by The Motley Fool