After the reverse stock split, is SiriusXM satellite radio a buy?

SiriusXM Holdings (NASDAQ: SIRI) launched almost a generation ago with big plans to disrupt media.

Fast forward to 2024 and those plans appear to have largely fallen flat. Native internet alternatives such as Spotify surpasses SiriusXM in audience size and market cap, and SiriusXM has struggled to break away from the automotive market, where it is most popular.

However, SiriusXM just made an unusual move, and some investors seem to think it could be the catalyst for a stock breakout.

A spin-off and a reverse stock split

On September 9, Liberty Media completed its Liberty spin-off SiriusXM Holdings, which is now known as SiriusXM Holdings.

The transaction reduced the number of shares outstanding by about 12%, after which the company adopted a 1-for-10 reverse stock split that lifted the share price into the penny-stock range.

The deal seemed to breathe new life into SiriusXM and could give it a fresh start. The company’s management will have more flexibility as Liberty Media takes over.

Sirius reiterated its full-year guidance for revenue of $8.75 billion and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $2.7 billion. It also lowered its free cash flow guidance from $1.2 billion to $1 billion to account for costs related to the split.

Additionally, the company declared a quarterly dividend of $0.27, giving it a yield of 4.6%, and announced a $1.166 billion share repurchase program.

Reverse stock splits are generally a warning sign for investors. Companies typically use them when their share prices have fallen so much that they don’t comply with their stock exchange’s listing rules. Merging shares increases their face value, which can bring such companies back into compliance and prevent them from being delisted.

That wasn’t exactly the case with SiriusXM, however. True, its stock traded below $10 per share for several years, partly as a result of the company issuing stock to stay afloat during the 2008-2009 financial crisis. However, the company looks a lot more stable now than regular inverse stock splits.

Sirius after the breakup

Sirius is solidly profitable, but the company has struggled to grow revenue and audience in recent years. The satellite radio veteran continues to target a mid-to-low leverage ratio of 3x adjusted EBITDA and plans to spend its free cash flow on investments, maintaining its dividend and paying down debt.

The company ended the second quarter with $9 billion in long-term debt, which means it is within its target leverage ratio range based on its $2.7 billion EBITDA forecast.

The story continues

SiriusXM also said it is evaluating the goodwill and intangible assets it inherited from Liberty Media, which could lead to an impairment in the third quarter. However, this would be a non-cash accounting charge.

Is SiriusXM a buy?

For dividend investors and value investors, SiriusXM looks like a good candidate. The stock trades at a price-to-earnings ratio of 7, and its 4.6% yield at the current share price is also attractive.

However, it’s reasonable to wonder how sustainable the company’s business is, which likely explains its low valuation.

Sirius will likely lose Howard Stern next year when his contract expires as he is expected to retire. The company also continues to lose market share to rival platforms like Spotify, and satellite radio seems less relevant as more vehicles are equipped with Internet-ready interfaces like Carplay.

In the third quarter, Sirius’ revenue fell 3% to $2.18 billion, and total subscribers fell 100,000 sequentially from the second quarter to 33.3 million; its subscriber base fell by 806,000 from a year earlier.

For the right kind of investor, Sirius could be a good choice, especially if the company takes advantage of the low stock price and buys back its shares. However, investors should keep an eye on revenue and subscriber trends to ensure the business is stable. While these risks are mitigated given the company’s low valuation, they are still the biggest threats to SiriusXM’s stock.

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Jeremy Bowman has no position in any of the listed stocks. The Motley Fool has positions in and recommends Spotify technology. The Motley Fool has a disclosure policy.

After the reverse stock split, is SiriusXM satellite radio a buy? was originally published by The Motley Fool