Can Buying Sirius XM Stock Today Set You Up for Life?

last month, Sirius XM (NASDAQ: SIRI) completed a series of complex merger and acquisition changes involving privately held Liberty Media. The result consolidates ownership under a single symbol, allowing the new company to operate independently. In addition, Sirius XM conducted a 1-for-10 reverse stock split to lift its declining stock price, hoping to remove the stigma that comes when stocks spend years trading at low prices.

The stock price initially fell in response to the changes, in part because reverse stock splits are a classic red flag, Maria hails, for companies surrounding the leak. But unlike most reverse splits, Sirius XM’s core business is financially sound. It’s a new beginning that will hopefully spark big things for a company that has stagnated in recent years.

Is this the start of a bright future for Sirius XM and its shareholders? Or will it end badly? Here’s what you need to know.

Can Sirius reignite growth?

Sirius XM is best known for satellite radio, which it has dominated since Sirius merged with XM in 2008. The company’s primary sales channel is automotive; many new vehicles come with a free trial in the hope that you will become a paying subscriber. Sirius XM evolved in search of growth. In 2019, it acquired internet streaming service Pandora to expand its reach beyond satellite radio. The company also launched a free ad-supported service to generate advertising revenue.

Paid subscriptions are still Sirius XM’s primary source of revenue. The company generated $6.3 billion from its 33 million paid subscribers last year, compared with $1.8 billion from ads directed at the other 117 million “free” listeners. Sirius XM’s biggest problem is that its paid subscriptions have grown. The company had about 32.7 million paid subscribers at the end of 2017, so that number has grown by about 300,000 over the past six years.

This stagnation makes growth difficult. Revenues have been declining since mid-2022, and analysts expect further deterioration next year:

One challenge is that Sirius XM is having trouble attracting younger generations to satellite radio, a somewhat outdated technology. Today, vehicles are equipped with software to integrate smartphones into the entertainment system and similar companies Apple and Spotify provides easy and inexpensive access to quality audio content.

It’s a challenge that Sirius XM needs to solve to provide the growth needed to make the stock a winner.

Potential double digit returns at a bargain price.

Despite its growth hurdles, Sirius XM is a very profitable company. Its 60% gross margins are some of the best in the media industry, and Sirius XM retains paying subscribers well. Its 1.5% churn rate is well below Spotify’s 3.9%. As a result, Sirius XM generates a fair amount of free cash flow that management can use to create shareholder value.

The story continues

The company pays a nice dividend that yields 4.7% at the current share price. That will cost Sirius XM just $409 million of its anticipated $1.1 billion in cash flow this year, leaving plenty of room to pay down its debt. Additionally, analysts expect Sirius XM to grow revenue by an average of 10% annually over the next three to five years. The company is expanding its pricing plans to offer users more options that will hopefully drive subscriber growth.

If all goes according to plan, the stock can maintain its current valuation and earn annual returns of 14% to 15%. The stock’s dubious record has made the market somewhat skeptical. Today, Sirius XM trades at just 7 times estimated 2024 earnings. That’s very cheap for a company with anticipated double-digit earnings growth.

Can Sirius XM Prepare You for Life?

Sirius XM is an established company that occupies a niche in the competitive audio media industry. I don’t see much room or opportunity for the company to reinvent itself, which means the stock’s growth will come down to how well management runs the existing business and uses its cash flow to create value for investors.

The stock’s low valuation gives investors a margin of safety and could boost returns if Sirius XM surprises Wall Street and earns a higher valuation. But life-changing ROI requires steady growth over the long term, and Sirius XM doesn’t have a clear path here. Management has a long-term goal of 50 million subscribers, but setting a goal is not the same as achieving it.

Sirius XM looks like a solid deal, a buy for its attractive valuation and generous dividend, but right now, it’s hard to get past that.

Should you invest $1,000 in Sirius XM right now?

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Spotify Technology. The Motley Fool has a disclosure policy.

Can Buying Sirius XM Stock Today Set You Up for Life? was originally published by The Motley Fool