SiriusXM Holdings (SIRI +1.62%) launched nearly a generation ago with big plans to disrupt media.
Fast-forward to 2024 and those plans seem to have mostly fallen flat. Internet-native alternatives like Spotify dwarf SiriusXM in audience size and market cap, and SiriusXM has struggled to break away from the automotive market where it's most popular.
However, SiriusXM just made an unusual move, and some investors seem to think it could be a catalyst for a breakout in the stock.
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A spin-off and a reverse stock split
On Sept. 9, Liberty Media completed its spin-off of Liberty SiriusXM Holdings, which is now known as SiriusXM Holdings.
The transaction reduced the number of shares outstanding by approximately 12%, after which the company enacted a 1-for-10 reverse stock split that lifted the share price out of the penny-stock range.
The transaction seemed to breathe new life into SiriusXM, and could give it a fresh beginning. The company's management will have more flexibility as Liberty Media takes a back seat.
Sirius reiterated its full-year forecasts for revenue of $8.75 billion and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $2.7 billion. It also trimmed its free cash flow guidance from $1.2 billion to $1 billion to account for charges related to the spin-off.
Additionally, the company declared a quarterly dividend of $0.27, giving it a yield of 4.6%, and announced a $1.166 billion share repurchase program.
Reverse stock splits are generally a warning sign for investors. Companies typically use them when their stock prices have fallen so far that they've gone out of compliance with their exchange's listing rules. Merging shares together lifts their face value, which can bring such companies back into compliance and keep them away from being delisted.
That was not exactly the situation with SiriusXM, however. True, its stock has traded below $10 a share for several years, partly as a result of the company's issuing more stock to stay afloat during the 2008-2009 financial crisis. However, the company looks much more stable now than the typical reverse stock split stock.
Sirius after the split
Sirius is solidly profitable, but the company has struggled to grow its revenues and audience in recent years. The satellite radio veteran continues to target a leverage ratio of mid-to-low 3 times adjusted EBITDA, and plans to spend its free cash flow on investments, maintaining its dividend, and paying down its debts.
The company finished the second quarter with $9 billion in long-term debt, meaning it's in range of its target leverage ratio based on its EBITDA forecast of $2.7 billion.
SiriusXM also said it's evaluating the goodwill and intangible assets it inherited from Liberty Media, which could lead to a write-down in the third quarter. That would be a non-cash accounting charge, though.
NASDAQ: SIRI
Key Data Points
Is SiriusXM a buy?
For dividend investors and value investors, SiriusXM looks like a good candidate. The stock trades at a price-to-earnings ratio of 7, and its yield of 4.6% at the current share price is also attractive.
However, it's reasonable to ask how sustainable the company's business is, which likely explains its low valuation.
Sirius is likely to lose Howard Stern next year when his contract expires, as he's expected to retire. The company also continues to lose market share to rival platforms like Spotify, and satellite radio seems less relevant as more vehicles are equipped with internet-ready interfaces like Carplay.
In the third quarter, Sirius's revenue fell 3% to $2.18 billion, and total subscribers fell by 100,000 sequentially from the second quarter to 33.3 million; its subscriber base was down by 806,000 from a year earlier.
For the right kind of investor, Sirius could be a good choice, especially if the company takes advantage of its low share price and buys back its stock. However, investors should keep an eye on revenue and subscriber trends to ensure that the business is stable. While those risks are diminished given the company's low valuation, they are still the biggest threats to SiriusXM stock.
