The inevitable appears to be happening. Howard Stern -- the controversial and iconic morning show host that put Sirius XM Holdings (SIRI -0.43%) on the map two decades ago -- could be moving on from satellite radio. Sources told The Sun last week that Sirius XM would be canceling the show after its fourth five-year contract concludes at the end of this year.
A lot of stories since last week's revelation have been playing this up as the "firing" of the radio legend that you either love or hate. It's not technically true. The Sun's source is saying that Sirius XM will make an offer, but that it will be well below the annual nine figures that Stern's camp has received in the past.
"Sirius and Stern are never going to meet on the money he is going to want," the unnamed source says. "It's no longer worth the investment."
This is also the big question for the market: Is Sirius XM itself no longer worth the investment? The stock has fallen both in price and in favor. Let's take a closer look at where the meandering media monopoly goes from here.
Two decades of decadence
Disruptors get disrupted. Sirius XM was a media stock darling for growth investors more than a decade ago, but these days it's attracting value investors with its low valuation and chunky payouts. Organic revenue growth hasn't shifted out of a single-digit gear since 2014, and this will be the third consecutive year of negative top-line growth.
Stern's migration from terrestrial radio to Sirius in 2006 was huge for the nascent platform. Sirius had just 3.3 million subscribers. Larger rival XM was beaming audio content to its 6 million accounts. Stern's arrival leveled the playing field between the two players, and a couple of years later it was Sirius in the driver's seat, executing a merger of equals.
This was before the smartphone and connected car gave nearly everyone behind the wheel access to a world of apps that could play seamlessly through their car stereos. However, even with its audience contracting, Sirius XM entertains more than triple the listeners that the two players combined were reaching before Stern made his move.
Image source: Getty Images.
Interrupting the fadeout
Sirius XM remains profitable. It's still cranking out 10-figure annual free cash flow. If this is the end of Stern on the platform -- and that was always a possibility, even if Sirius XM were willing to pay up for show -- it doesn't mean the end for satellite radio. The biggest problem at Sirius XM these days isn't keeping listeners around. The monthly churn rate of 1.5% continues to hover around the company's historical average. The real trick is finding new listeners.
The funnel of young drivers hopping on free trials of the service has been dry for years. The connected car is a factor, but so is a changing workplace that no longer revolves around long commutes in a world of working from home. And the current appeal of Stern to new listeners is different from 20 years ago. It's not Stern's fault. Sirius XM is a walled garden: If you're not a subscriber, you don't have access. Stern has tried to make himself relevant outside his satellite radio fan base. He was a host on America's Got Talent for a couple of years. However, that's not the kind of gig that will motivate someone to sign up for a premium in-car and streaming service.
Another revolution that has grabbed the ears of listeners over the past 20 years is podcasting. Even if you're in your car, you're going to spend less time listening to radio because now you can stream your favorite podcast if you're not in the mood for a music streaming app. Sirius XM has been making moves on that front, lining up popular podcasters including Alex Cooper, Rotten, and Smartless. This wasn't much of an initiative the last time Stern renewed with Sirius XM, but it is a priority now -- especially with the need for the platform to skew younger if it wants a shot at returning to growth.
Stern will be fine. Sirius XM will be fine. Investors -- while they wait out the process -- will be fine. The stock is now trading for less than 7 times next year's projected earnings with a 5.1% dividend yield. Stern isn't likely to come back to Sirius XM on the cheap, but investors can do so right now.
