On the surface, Sirius XM Holdings (NASDAQ:SIRI) looks like a powerhouse. The company's subscription model and its relationship with auto manufacturers appear to put it in a position to deliver steady growth for the long term.
That has certainly been the recent story. The company added 298,000 new self-pay subscribers in the third quarter, raising its total to 33.7 million at quarter end. It also delivered a 24% increase in net income, with diluted earnings per share inching up to $0.07 from $0.06 in the same quarter in 2017.
"SiriusXM's standout third quarter saw continued strength in subscriber additions and churn performance while adjusted EBITDA reached a quarterly record-high $589 million," said CEO Jim Meyer in the Q3 earnings release. The company has also made a deal to acquire Pandora Media (NYSE: P), which it expects to close in early 2019, and it has increased its full-year guidance for self-pay net additions as well as sales and adjusted pretax operating earnings.
Reasons to be wary
While Sirius XM appears to have a rock-solid business, there are reasons to be worried. Whereas it once offered a unique, clear alternative to terrestrial radio, the satellite service has now become one of multiple options for consumers -- many of which are free.
When the satellite services, which used to be two separate companies, launched, unlimited data was not the norm and all-you-can-listen music services barely existed, and podcasts were in their infancy. Now unlimited is the default, there are multiple all-you-can-listen music services, and the podcast world has exploded.
Unlimited data means that most consumers have a satellite replacement in their phone. You can listen to exactly the music you like, or pick from a range of podcasts and even listen to some sports programming, without paying an extra monthly fee.
Sirius XM has tried to compete by having exclusive programming. It does have Howard Stern -- perhaps the only proven performer in talk radio who has an audience willing to pay -- but he's year to year at this point, as he has long contemplated retirement. The satellite service also has exclusive sports coverage and lots of other programming. It's also constantly adding content.
"We have a relentless focus on creating and curating content our subscribers will love -- our limited-run Dave Matthews Band Radio was a perfect example," Meyer said. "We also presented fiery live performances just for subscribers, like our recent show by the Killers in New York. We've added provocative talent in talk and sports, with a daily show from CNN's Chris Cuomo, a new show from Hall of Famer Reggie Jackson, the return of Brett Favre's popular show, and a new program highlighting women in sports hosted by journalist Christine Brennan and retired tennis pro Rennae Stubbs."
That all sounds great, but in a world where seemingly every comedian and many personalities from all sorts of areas have free podcasts, and music services allow you to hear exactly what you want, it's probably not enough. Sirius XM has some excellent programming, but it has clearly moved from unique to convenient but superfluous.
Is Sirius XM a buy?
Sirius XM could go one of two ways. It could retain its audience through inertia -- meaning people just keep subscribing because it's easy and the service is built into their cars -- or consumers could start realizing they no longer truly need satellite radio.
This is a product that has become a luxury. It's vulnerable to every consumer who looks at how much they spend on subscriptions overall -- for everything from music services to over-the-top television. Moreover, there are a host of companies all competing for these discretionary spending dollars.
In the long run, that makes Sirius XM vulnerable. It's still a good product, but you can get good-enough alternatives for free. It might well take years for that fact to show up in its share price, but that fact makes Sirius XM a scary stock to own in the long term.