Sirius XM Holdings (SIRI 4.27%) delivered a knockout financial performance at first glance. Revenue in the third quarter clocked in at $1.38 billion, a mere 8% advance but just ahead of the 7% that analysts were targeting. Diluted earnings per share soared 49% to $0.06, well ahead of the flat showing that Wall Street was forecasting.
The satellite radio provider also boosted its guidance for revenue, adjusted EBITDA, and free cash flow for all of 2017. The market's response was lukewarm. Sirius XM stock opened lower and was trading nearly 5% lower a couple of hours into Wednesday's session. Let's dive into the reasons why Wall Street isn't impressed.
1. The bottom-line beat might not really be a beat
Net income soaring 42% and up 49% on a per-share basis is going to turn heads, but it's not coming on an apples-to-apples basis. This quarter was padded with a one-time gain of $87 million that was only partly offset by a $44 million one-time hit on the extinguishment of debt.
Sirius XM also accounted for a lower effective tax rate this time around. Go up a few lines and you'll see that Sirius XM's operating profit rose by a more modest 11%, a more accurate portrayal of Sirius XM's earnings power.
The model is scalable, and shareholders are definitely buying into a company where earnings and EBITDA are growing faster than revenue. However, the posted bottom-line results aren't reflective of Sirius XM's actual improvement.
2. Subscriber growth is slowing
Sirius XM routinely boosts at least some aspects of its guidance, so that's the kind of conservatism that's already baked into the stock price. However, it's still telling that the one metric that didn't get revised higher is the 1.4 million net additions in self-pay subscribers that Sirius XM is projecting for 2017.
The media giant did close out the third quarter with 311,000 more self-pay subscribers than it had when the period began. Sirius XM is now at 27 million self-pay accounts and 32.2 million total subscribers. The premium radio platform has debunked the naysayers that figured cheaper or free ad-supported streaming apps would crush Sirius XM in the era of the connected car. However, growth is undeniably slowing even as Sirius XM is able to squeeze out more revenue per user with every passing quarter. Sirius XM's revenue growth of 8% is its second weakest top-line gain in nearly six years.
3. Sirius XM stock was rolling ahead of the report
Sirius XM shares had recently hit their highest levels in more than a decade. The stock has soared nearly 40% over the past year. That's a lot of octane for a slowing company.
This doesn't mean that investors should dump the stock. Sirius XM has been consistently profitable, and it's hard to give up on a company that routinely pushes its conservative guidance higher. However, even the best of stocks correct. Sirius XM is correcting following a report that was solid, and only bears will be surprised if the stock isn't trading higher in three months for the next quarterly checkup.