What happened

Shares of satellite streaming music player Sirius XM (SIRI -4.91%) tumbled 7.5% through 10 a.m. ET Thursday after missing analyst estimates on both the top and bottom lines this morning -- only to pop back up and turn positive again by 11:30 a.m.

But should it have popped back up?

Heading into the first quarter of 2023, Wall Street had forecast Sirius would earn $0.07 per share on sales of just under $2.2 billion. As it turned out, Sirius earned $0.06 per share, on sales of just over $2.1 billion -- not big misses to be sure, but misses nonetheless.  

So what

Sales for the quarter were down a "modest" (management's word) 2%, but earnings fell a more dramatic 25%, from $0.08 per share a year ago to $0.06 in Q1 2023. Free cash flow plummeted 44% to just $145 million, primarily due to greater capital investment.  

Subscribers to SiriusXM declined by 347,000 due to a confluence of Sirius spending 17% less on advertising this quarter than a year ago, and car sales being weaker (SiriusXM being used most commonly while driving). Management also noted that Q1 is usually a seasonally weak quarter for SiriusXM services. However, Pandora subscribers were also down 2% year over year -- with no such disclaimer for seasonality.

Curiously, management described all these results as exceeding its expectations, and took this as a cue to raise guidance for the rest of this year, citing "sustained low churn, high customer satisfaction, and strong margins."

Now what

Management now forecasts that it will end 2023 with $9 billion in revenue -- more than you'd expect with a $2.1 billion run rate. And while giving no guidance for earnings as calculated according to generally accepted accounting principles (GAAP), Sirius forecast free cash flow (FCF) of $1.1 billion.

That seems a high number given the exceptional weakness seen in Q1 FCF. On the other hand, it's true that historically, Sirius has generated more free cash flow in its last three quarters than in its first. It is notable, however, that even if Sirius hits its $1.1 billion target, this would represent a significant -- more than 20% -- drop from the $1.4 billion in cash profit generated last year. It would also be Sirius' third straight year of shrinking FCF.

Given the direction of this trend, I'm not certain I'd want to own Sirius stock today at its current valuation of nearly 22 times current year free cash flow.