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3 Reasons Sirius XM Holdings Inc. Stock Could Rise

By Rick Munarriz – Feb 14, 2016 at 9:06AM

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The satellite radio provider has stumbled so far this year, but an uptick in conversion, buyout chatter, and increased guidance can turn the tide.

Image source: Sirius XM.

It's been a rough start to the year for Sirius XM Radio (SIRI 0.81%). Shares of the satellite radio provider are trading 15% lower so far in 2016, but this doesn't mean that things will end that way.

There are a few things that can turn sentiment for Sirius XM stock around. Let's check them out. 

1. Sirius XM's conversion rate could top 40%
One of the few dark clouds in Sirius XM's otherwise solid quarterly report earlier this month was that its conversion rate hit a historic low. The percentage of buyers of new cars with factory-installed receivers that continue to pay for service after their free trials of Sirius or XM run out slipped below 40% during the fourth quarter. 

This isn't as scary as it might seem. Conversion rates will naturally shrink. Automakers are adding satellite radio receivers to their more economical cars, reaching folks that can't afford to pay for premium radio. We're also now deeper in the rollout cycle. A lot of people that had satellite radio before and canceled -- only to buy new cars -- aren't going to be very interested in paying again. 

This is the new normal, and thankfully Sirius XM is making it up in volume. Its subscriber count continues to grow despite its conversion rate ticking lower. As unlikely as it may seem, the stock would get a big boost if Sirius XM bucked the trend and delivered a conversion rate at 40% or above in an upcoming quarter. 

2. Buyout chatter could move the stock higher
Liberty Media (FWONA) received a 40% preferred share stake in Sirius XM when it saved it from bankruptcy in 2009, but things got interesting a few years later when it began to increase its position. Liberty Media now has a controlling 61% stake in Sirius XM. 

There was plenty of speculation that Liberty Media would acquire all of Sirius XM, and that hasn't happened. However, with a lot of consolidation taking place among media giants why wouldn't Sirius XM -- one of the few media monopolies out there -- be a juicy takeover target? Liberty Media isn't immune to selling assets if the right deal comes around. 

Sirius XM owns roughly a third of Sirius XM Canada, and reports on Thursday claimed that it was approached for a potential deal. If Sirius XM Canada is being pursued, it wouldn't be a surprise if the much larger and difference making Sirius XM isn't in some media giant's crosshairs. 

3. Guidance can move higher
Sirius XM closed out 2015 with 2.3 million more subscribers than it had when the year began. It didn't start that way. Sirius XM was only expecting 1.2 million subscribers at this point last year. This is why investors shouldn't be too concerned with its outlook for 1.4 million net additions in 2016 earlier this month.

Sirius XM seems to always issue conservative revenue, adjusted EBITDA, free cash flow, and subscriber growth forecasts, only to inch some if not all of those metrics higher with every passing quarterly report. This is the most likely of the three reasons to play out, and if the upticks are substantial it will move the stock higher.  

Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Sirius XM Holdings Inc. Stock Quote
Sirius XM Holdings Inc.
$6.20 (0.81%) $0.05
Liberty Media Corporation Stock Quote
Liberty Media Corporation

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