What happened
Shares of Sirius XM Holdings (SIRI) were down 12.7% at 10:14 a.m. ET on Friday following a massive jump on Thursday that has pushed the share price up 40% over the last five trading days.
Analysts at Pivotal Research Group and Deutsche Bank subsequently downgraded the stock to a sell rating, citing valuation concerns.
So what
The catalyst for the stock's jump this week appears to be a short squeeze, as investors were short the stock of Sirius XM and long shares of Liberty SiriusXM (LSXMA -0.90%) (LSXMB -0.37%) (LSXMK -0.53%) -- a tracking stock that owns 82.4% of SiriusXM and has traded at a large discount to the underlying value of its SiriusXM investment. It's a typical arbitrage trade in which shareholders hope to realize a profit as the stocks' relative values converge.
However, the recent rally in highly shorted stocks backfired, causing traders to buy shares of SiriusXM to close their short positions, which sent the stock surging.
Now what
Shares of SiriusXM collapsed earlier this year following mixed results for the fourth quarter of 2022. Management also offered a weak outlook for demand trends in 2023.
Sirius continued to report weak financial results in the first quarter, with revenue down 2% year over year, decelerating over the 4% increase reported in the fourth quarter.
SiriusXM has a unique competitive position considering its relationships with automakers, which provide a convenient means of connecting with millions of car owners. The company had 32 million self-pay subscribers at the end of the first quarter, although that was down from a record-high 32.4 million in the fourth quarter.
Still, after falling to a forward price-to-earnings ratio in the low teens, the stock is now trading at the same valuation level as before the sell-off earlier this year. Considering the company's weak revenue trends, the stock probably has limited upside at these levels. It will likely take a healthier auto market to attract more subscribers and get the company (and stock) growing again.
