Shares of Sirius XM Holdings (SIRI 2.20%) are slumping in 2020. Many stocks have been inching higher since the initial springtime pandemic sell-off, but the satellite radio monopoly is going the other way. Sirius XM stock hit a fresh five-month low on Monday.
The stock is trading 28% lower year to date through Monday's close, a pretty big deal since Sirius XM shares have delivered 11 consecutive years of positive returns until now. The streak will come to an end, but that doesn't mean the end is here for one of the hottest media stocks over the past decade. Let's go over some of the things Sirius XM will need to get right in the year ahead to start winning again.
1. Auto trends need to improve
After back-to-back quarters of declines in total subscribers -- despite upticks in self-pay net additions -- Sirius XM is down to 34.3 million total accounts. This is the first time in a decade that Sirius XM has experienced back-to-back periods of sequential dip in users, and you can't blame the satellite radio giant.
Sirius XM relies largely on cars with factory-installed receivers to deliver its content, and right now the auto industry is essentially up on blocks. COVID-19 has shut down consumer interest in new cars, and the recession has capped the ability to pay for new wheels. The negative trend started last year, long before the pandemic hit and while the U.S. economy was still expanding.
The coronavirus outbreak naturally left its mark. Most of us aren't driving as much as we used to, and that makes it harder to justify a premium radio subscription. However, our appetite for cars and driving will have to return once the pandemic and recession are eradicated. If you're not in love with your car -- if you don't have a feel for your automobile -- Sirius XM isn't going to grow its audience.
2. Guidance has to move higher instead of lower
The secret behind the success that made Sirius XM one of the market's biggest winners over the past 11 years -- a hundred-bagger since bottoming out in early 2009 -- is that it knew how to play the analyst game. Sirius XM would issue conservative guidance and analysts would believe it, only to see Sirius XM trounce expectations and raise its outlook.
This year obviously hasn't played out that way. Sirius XM began the year expecting to close out the year with 900,000 more self-pay subscribers than it had when the year started. It has slashed that goal nearly in half. Its revenue, adjusted EBITDA, and free cash flow targets have also inched lower in 2020.
Investors know that Sirius XM will be ready to play again when it increases its guidance. The second half of this year will be challenging, but the stock should recover if Sirius XM gets back to jacking up some or all elements of its guidance on a quarterly basis again by early next year.
3. Pandora needs to start paying off
Sirius XM's acquisition of Pandora seemed brilliant when it was announced in 2018 and completed in early 2019. Pandora would give Sirius XM a stronger foot in the door in the realm of streaming. The two companies would be able to combine their ad-selling leads. Each platform would be able to cross-promote the other, lifting both ships in the process.
The Pandora deal is not a failure, but it hasn't been a game changer. Monthly active users have shrunk from 64.9 million to 59.6 million over the past year. Total listener hours are also down, but thankfully not as much as the user base since engagement continues to improve for those still sticking around. Ad revenue plummeted 31% in its latest quarter, as the weak advertising market and Sirius XM's own dip in popularity have weighed on that front.
The one metric moving higher at Sirius XM -- outside of listening hours per active ad-supported user -- is its premium subscriber base. Pandora and Sirius XM will have to click together better in 2021 if the media stock wants to bounce back.