One of the more interesting aspects of putting your money to work on Wall Street is the ever-changing investing landscape. There's always a next-big-thing investment to captivate the attention of growth seekers, as well as some economic indicator forecasting doom.
But it's not just the environment around us that changes. The way we invest, analyze, and interpret data tends to change over time as well. Companies we once loved can fall out of favor or simply become like so-so investment opportunities. Meanwhile, businesses we wanted nothing to do with can, occasionally, do a 180 and sprout the seed of intrigue.
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At one time, I wouldn't have touched this monopoly stock with free money
Since 2023 began, I haven't done much in the way of adding to existing holdings or buying new stocks... with one exception. The company that I absolutely wanted nothing to do with 10 years ago is now the stock I can't stop buying. I'm talking about the lone satellite-radio operator Sirius XM Holdings (SIRI +0.00%).
To be brutally honest, I was stunned the company didn't spiral into bankruptcy during the financial crisis. But that all changed when John Malone's Liberty Media came to the rescue. Liberty SiriusXM Group (LSXMA +0.00%)(LSXMB +0.00%)(LSXMK +0.00%), which is now the majority owner of Sirius XM, agreed to invest as much as $530 million in the company in February 2009. This capital provided an immediate lifeline that allowed Sirius XM to meet its debt payments and grow its business.
Leading up to this ninth-inning save from Liberty, Sirius XM struggled. For more than a decade leading up to the financial crisis that sent the U.S. economy tumbling into a recession, Sirius XM had lost money. In fact, its losses were growing as it veered closer to a potential bankruptcy filing.
To boot, the company was facing increasing competition from online radio providers like Pandora Media. Despite being a monopoly in the satellite-radio space, this didn't remove the prospect of competition.
NASDAQ: SIRI
Key Data Points
Recessionary fears are doing a number on Sirius XM
Fast forward to 2023. Over the past six weeks, Sirius XM stock has been taken to the woodchipper. Shares have lost 40% since the company announced its fourth-quarter and full-year operating results for 2022 on Feb. 2 and provided relatively cautious guidance with regard to revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the current year.
Some Wall Street analysts and pundits have cautioned that advertising weakness could be a problem for Sirius XM. In February 2019, Sirius XM acquired the aforementioned Pandora Media, which is predominantly driven by advertising revenue. When even the slightest hint of economic data suggests a recession is possible, it's not uncommon for advertisers to pare back their spending.
There's also skepticism over how well Sirius XM will perform if auto sales slow. While trailing-12-month U.S. vehicle sales are right around their midpoint dating back to the mid-1970s, we've certainly witnessed a cooling in vehicle purchases since April 2021. Since Sirius XM relies on converting promotional subscriptions with newly sold autos into self-pay subscribers, an economic slowdown for the cyclical auto industry wouldn't be a good thing.
Even rapidly rising interest rates pose a concern. With historically cheap capital no longer available, a company carrying around a decent amount of outstanding debt, like Sirius XM, will almost certainly face less favorable financing rates in the future.
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Turn up the dial to a phenomenal bargain
But things change, and so has my view on Sirius XM.
This perennial money-loser now cranks out profits with consistency and generates an abundance of operating cash flow. One reason it's able to do so is that it's a legal monopoly. The advantage of being the sole satellite-radio operator is that, in most scenarios, Sirius XM holds significant subscription pricing power. In fact, the company began raising prices for its subscribers this week.
Another key point about Sirius XM is that it has a predictable cost structure. Although acquiring talent and paying royalties can certainly vary on a quarterly basis, what the company spends on transmission and equipment usually doesn't vary. In other words, Sirius XM isn't going to pay more in transmission costs if it adds 1 million, 2 million, or 10 million net subscribers. While equipment does need replacing from time to time, Sirius XM's transparent cost structure is a positive for its operating margin.
However, the most enticing aspect of Sirius XM from an investment standpoint is its revenue mix. Terrestrial and online radio companies heavily lean on advertising revenue to pay their bills. This works out just fine during long periods of economic expansion, but it can bite hard during recessions.
Based on the company's 2022 results, just 20% of Sirius XM's revenue came from advertising -- and that's pretty much all Pandora Media. While there's some possible revenue downside for Pandora if a recession were to arise, the 77% of sales Sirius XM derived from subscriptions is far stickier. Despite a challenging year for the U.S. economy in 2022, self-pay subscribers for Sirius XM hit an all-time high of 32.4 million. In short, Sirius XM is probably better positioned than any media stock to navigate a possible economic downturn.
The cherry on top is that its valuation makes a lot of sense. As of its closing price on March 14, shares can be purchased for less than 12 times Wall Street's forecast earnings this year and in 2024. Comparatively, it's been valued at an average of 23 times forward-year earnings over the past five years.
Sirius XM is a dividend-paying company, as well. Thanks to its predictable operating cash flow, shareholders are receiving an S&P 500-topping 2.9% yield.
Hell has officially frozen over! I'm a Sirius XM shareholder, and I'm not afraid to admit it.
