Sirius XM's Slowing Growth Makes It A Sell Ahead Of Earnings

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 |  About: Sirius XM Holdings Inc. (SIRI)
by: Wall Street Playbook

Summary

With Sirius stock trading at around $3.44 and a P/E of 61, I don't believe any sane person can say with a straight face that this stock presents any value.

Beyond the share buyback program, there is no compelling reason to hold this stock given the rate at which growth is slowing.

It says a lot that Apple and Google bypassed Sirius as an acquisition, especially since Sirius has close to 26 million subscribers and is already the market leader.

Since June 19, shares of Sirius XM (NASDAQ:SIRI) have hit a wall. The stock closed Friday at $3.44, down 0.29%. Shares are off 1.43% on the year to date, trailing other media stocks like Time Warner (NYSE:TWX) and Disney (NYSE:DIS), which are up 28% and 13%, respectively.

June 19 is important to note here because, during that span, the stock has reached an intraday high of $3.49 on three occasions. It has hit $3.48 seven times and $3.47 four times.

The reason this is important is because on April 25 I told you the stock was worth only $3.50. This was after shares hit a low of $3.08 that day. In other words, the market agreed with me. Investors now want to know where the stock is heading next. Sirius reports second-quarter earnings results Tuesday. As for a higher stock price? Don't hold your breath.

The company is facing slowing growth. In the auto segment, its bread and butter, Sirius is facing rising competition from the likes of Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN). Then there is Spotify, which is growing faster than anyone predicted.

Spotify's audio streaming service, which has enjoyed consecutive years of subscriber growth, released its 2014 numbers of active users, including paying subscribers. The company says it has now amassed more than 40 million active users worldwide.

And when you combine this with Pandora (NYSE:P), which is approaching 80 million active listeners, it suggests that the market for premium audio is not as interested in paying for music. This is what Apple and Google understand. It's why they've gone the M&A route to grow their streaming portfolios buy buying Beats and Songza, respectively.

It also says a lot that they've bypassed Sirius as an acquisition, especially since Sirius has close to 26 million subscribers and is already the market leader in the dashboard. So what's the problem? Sirius is struggling with growth.

In its most recent quarter, Sirius posted revenue of $997.7 million, up 11% year over year. But during the quarter, Sirius posted 266,799 net subscriber additions. While growth of any kind is good, this figure, which was 11% shy of our 300K estimate, was somewhat weak.

From a profitability standpoint, the company posted a net income of $94 million. But this, too, was weaker than our estimates. This represents a 24% year-over-year decline. Last year, Sirius earned a profit of $123.4 million. On a per-share basis, earnings were flat, at two cents.

Management said that this was due to a one-time adjustment related to its Liberty Media (NASDAQ:LMCA) stock buyback agreement. The figure also reflects an adjustment from Liberty backing out of the January deal. But from my vantage point, the weak profits were due to growing operating expenses, which climbed 15% year-over-year to $750.3 million.

Royalty payments continue to take a significant chunk out of the bottom line. On Tuesday, I expect more of the same.

Wall Street will be looking for 2 cents per share in earnings on revenue of $1.02 billion. Earnings are projected to be flat, while revenue is projected to grow at 8.4%. As I've said, growth is slowing. Assuming that Sirius does meet revenue of $1.02 billion, this would represent a deceleration of growth of 3% sequentially and 4% year over year.

By contrast, Spotify is growing both active users and paying subscribers at close to a 70% rate. Spotify is now by-far the fastest-growing service in both categories - free and premium. By these standards, there is no way for Sirius to be seen as anything other than a platform that has reached its peak and is on the decline.

For now, with Sirius stock trading at around $3.44 and a P/E of 61, I don't believe any sane person can say with a straight face that this stock presents any value. Beyond the share buyback program, there is no compelling reason to hold this stock given the rate at which growth is slowing.

Disclosure: The author is long AAPL.

Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.