One of the market's most unlikely success stories over the past decade could be cooling down. Sirius XM Holdings (SIRI +0.00%) hit a 12-year-high on Monday, only to trade lower on Tuesday following an analyst downgrade.
Jeffrey Wlodarczak at Pivotal Research downgraded the satellite radio provider from buy to hold. He's sticking to his once-generous price target of $7.75. With the stock trading as high as $7.70 on Monday, Wlodarczak's call is simply a valuation call. Sirius XM shares had soared 43% in 2018 as of Monday's close, a pretty impressive run relative to the overall market's rather pedestrian return this year.
Image source: Sirius XM Holdings.
Corrections aren't fatal
With Sirius XM's stock seemingly outpacing its fundamentals, Wlodarczak's downgrade may not seem so crazy at first glance. Revenue growth has slowed to 6% in Sirius XM's latest quarter, and its guidance calls for continuing deceleration with 5% top-line growth for all of 2018. The outlook for free cash flow and adjusted EBITDA is even worse.
Like other analysts, Wlodarczak feels that Liberty SiriusXM (LSXMA +0.00%) is the better way to bet on the resilient satellite radio monopoly. The controlling stakeholder in Sirius XM is trading at a steep discount to the value of its underlying shares.
The problem with the downgrade is that other Wall Street pros made the same argument when Sirius XM was trading much lower. Oh, and as for the recommendation to buy Liberty SiriusXM as a thinking investor's proxy for Sirius XM, well, the stock was only trading 21% higher in 2018 through Monday's close. Liberty SiriusXM also took a hit on Tuesday with the downgrade of Sirius XM, so it seems to be a tracking stock that isn't immune to the downside but isn't participating fully in the upside. We saw the same thing play out last year, though not to this kind of extreme as Sirius XM's 21% gain outpaced the 15% rise for Liberty SiriusXM.
The outperformance of Sirius XM's stock naturally means that Liberty SiriusXM's discount is widening, something that may seem to make Liberty SiriusXM that much more compelling at this point. Investors have been burned by going that route in the past, but it doesn't mean that it will continue to be that way in the future. For now, it seems as if investors just prefer to buy Sirius XM -- the shares that were on a streak of hitting fresh 12-year highs for nine consecutive trading days before Wlodarczak's downgrade.
Sirius XM may have hit a near-term peak on Monday, and Liberty SiriusXM may be the smarter investment at this point. However, don't be surprised if we're eyeing the same story to play out when another analyst upgrades Liberty SiriusXM or downgrades Sirius XM since the discount has only widened.
