Source: Sirius XM.
It's been a surprisingly ho-hum year for one of the market's biggest winners in recent years. Shares of Sirius XM Holdings (SIRI +0.00%) are trading just below where they were when the year began. If the stock fails to close at $3.49 or higher by the end of 2014 it will break a streak of five consecutive years of gains for investors.
Investors that have been fortunate enough to ride the stock from its all-time low of $0.05 in early 2009 aren't likely to complain, but naturally no one's buying a volatile stock like Sirius XM to be satisfied by merely marching in place for a year.
Thankfully at least one analyst sees the stock hitting $5 before long. That's the price target that Bank of America Merrill Lynch's Jessica Reif Cohen has had on the satellite radio provider since March when Liberty Media (LMCA +0.00%) gave up on its plan to acquire all of Sirius XM. Cohen reiterated the round milestone in a fresh report ahead of this month's third quarter report. It's a lofty goal, but Cohen's been there and come through before.
Cohen isn't afraid of holding the high card. She initiated coverage of Sirius XM two years ago with a $3.75 price target at a time when the highest goal among major analysts was $3.35. It seemed like a lofty forecast at the time, calling for the stock to appreciate by roughly 50% to get there. It didn't take long. It took just nine months for the stock to eventually hit her target.
that being said, Sirius XM hasn't lived up to all of her expectations. Two years ago she was targeting 30 million subscribers by the end of 2016. Now her target is just shy of 29 million at that point. Subscriber growth has slowed despite the spike in new cars selling with Sirius or XM factory-installed receivers.
However, the real growth story at Sirius XM isn't a headcount of users, which currently stands at 26.3 million subs. Sirius XM's adjusted EBITDA, free cash flow, and earnings have grown faster than revenue as the media heavyweight takes advantage of its economies of scale. We saw that on display during the second quarter when subscriber growth and revenue rose 5% and 10%, respectively, but free cash flow soared 42%.
Looking ahead
Sirius XM has an important quarterly report coming up in a couple of weeks. It will be our last official glimpse into its financials during the calendar year, making this the stock's best shot to extend its winning streak to six years with a strong showing.
Analysts see revenue climbing 8% to $1.04 billion with profitability essentially doubling to $0.02 a share. Cohen is in line with her peers, also calling for revenue to check in at $1.04 billion. She sees adjusted EBITDA up 24% to $368 million.
There are plenty of moving parts at Sirius XM these days. Average revenue per user is inching higher since a slight monthly rate increase earlier this year. Conversion rates of free trial customers have been trending lower -- down to 42% in its latest quarter, off from its 46%-48% range a couple of years ago -- but that also comes at a time when Sirius XM is expanding its reach into the used car market where conversion rates are lower. We've had a healthy emphasis on buybacks, gnawing away at its puffy share count. It also remains to be seen what Liberty Media will do with its controlling stake in the company.
Sirius XM has been doing a lot of things right this year. The market hasn't rewarded investors so far in 2014, but we still have nearly three months left to keep one of the more surprising winning streaks alive for another year.
