Shares of Sirius XM Holdings (SIRI +7.53%) were rallying on Wednesday, up as much as 7.9% before retreating to a 7.5% gain on the day.
Sirius received a bullish sell-side analyst note on the company's digital advertising opportunity, and the stock responded accordingly.
NASDAQ: SIRI
Key Data Points
Is a turnaround taking shape?
Today, Deutsche Bank analyst Bryan Kraft upgraded Sirius shares from "Hold" to "Buy" and raised his price target to $45, up from $31. Kraft believes that investors aren't appreciating Sirius' digital advertising opportunity,
Sirius is on track to become YouTube's exclusive digital audio advertising partner this Fall for audio-focused YouTube content, following the two companies' April agreement. Under the terms of the partnership, YouTube is opening its audio-focused inventory to SiriusXM Media, Sirius' "sell-side" digital advertising solutions platform, enabling ad buyers of SiriusXM inventory to seamlessly buy YouTube ads on YouTube's audio-oriented content, such as podcasts.
This may seem like YouTube is bailing out SiriusXM, as SiriusXM's subscriber count has declined in recent years while YouTube has posted healthy growth. However, SiriusXM's subscriber base may also skew toward higher-income households, and that cohort of devoted listeners is likely to be coveted by advertisers. So, it's no surprise to see YouTube partnering with Sirius on the initiative.
Sirius' ad revenue grew 5.1% last quarter, well above the flattish subscriber growth, marking an acceleration relative to prior quarters. Keep in mind, this is really before the YouTube partnership has even begun to show up meaningfully in financial results. That's why Kraft believes consensus estimates appear to be "completely disregarding" that likely growth in the quarters ahead.
Image source: Getty Images.
Sirius still looks like a cheap stock today
At roughly $29.70 as of this writing, Sirius' market cap is about $10 billion. Meanwhile, the company just raised its free cash flow guidance for this year by $25 million to $1.375 billion. That means the stock still trades at roughly 7.3 times this year's free cash flow guidance.
That's a pretty low valuation for a subscription-based company with a smaller yet accelerating ad business, even with another $9.4 billion in debt on the balance sheet.
In other words, Kraft's new price target, as big an increase as it is, doesn't seem implausible. Investors are understandably skeptical about the sustainability of growth, given that Sirius subscribers have been in decline since the end of COVID. But if the new growth can be sustained with the YouTube partnership kicking in soon, Sirius still looks cheap, even after an impressive 49% year-to-date gain.
