The growth engine is starting to slow dramatically at Sirius XM Holdings (SIRI -1.94%). The satellite-radio provider offered up reasonable fourth-quarter results on Tuesday morning, but it's the media giant's disappointing outlook for the year ahead that's putting a chill in the historically hot investment.
Sirius XM calling for revenue of approximately $8.1 billion for all of 2020 translates into less than 4% top-line growth. This would be the weakest revenue increase in the company's history. Analysts weren't holding out for much, but they were perched slightly higher at $8.22 billion on the top line this year. The sharper-than-expected deceleration could put an end to the stock's impressive 11-year streak of positive returns, but if there's one thing that investors have learned over the years, it's that you don't count Sirius XM out when you think the party's over.
Rising above ho-hum guidance
The fourth quarter itself was solid. Revenue soared 38% to $2.062 billion, fueled largely by the Pandora acquisition that's been padding the top line since it was absorbed into Sirius XM's bloodstream in February of last year. Wall Street was settling for just a 35% top-line ascent. Operating income and earnings took a small step back, but that was in line with expectations as earnings per share nailed the $0.05 a share that analysts were targeting.
The concern here is all about what Sirius XM sees through the windshield instead of the rearview mirror. Single-digit organic growth isn't a deal breaker. Sirius XM cranked out four consecutive years of single-digit revenue gains before last year's purchase of the iconic streaming music service, temporarily inflating its revenue bursts. However, with organic top-line growth slowing to a then-record low of 6.4% in 2018, bulls were hopeful that having Pandora in Sirius XM's holster would increase the opportunities to milk more money out of both platform audiences.
Sirius XM's guidance is problematic because the 3.9% increase in revenue that it's forecasting includes a month of hearty double-digit growth for January -- the last month when growth benefitted from not having Pandora on its books a year earlier. Sirius XM's outlook calling to add 900,000 self-pay net subscribers in 2020 isn't a bad look at first glance, but it would put an end to its 10-year streak of nabbing at least a million self-pay net accounts in a year.
It's not all bad news. Churn is holding up well, and average revenue per user continues to rise for both Sirius XM and Pandora. Sirius XM sees free cash flow and adjusted EBITDA continuing to improve in 2020 off of record levels in 2019. Another thing bears need to keep in mind is that Sirius XM has historically been conservative with its forecasts. It has typically boosted one if not more of its guidance metrics with every passing quarter as the year plays out. Sirius XM has also boosted its payout by 10% in each of the three past years, making it one of the more intriguing stocks for dividend investors. However, with new auto sales declining and the options for in-car entertainment increasing, the report isn't pretty. Growth will definitely slow once we get past the first quarter, and investors will be keeping an eye on how hard Sirius XM is going at the brake pedal.