The recent debate over the future growth prospects of Sirius XM (SIRI) has heated up. The stock has taken a beating lately, even after strong earnings. It appears the sour economic environment has taken its toll on the company. The current "Crisis of Confidence," as it's been called, is going to affect the consumer for the coming years. With economic growth basically anemic, I find it difficult to invest in a company whose product and business model may have peaked.
With that being said, SIRI's recent earnings release proved to be quite encouraging, pushing the stock 5% higher only to end up lower on the day. Revenue was solid, $744.4 billion (below expectations), while the net new subscribers increased. Sirius' push into new and used cars has been quite effective in attracting new users. The unveiling of a new "2.0" platform is an example of innovation and how it plans to stay competitive with the likes of Pandora (P) or Spotify.
However, the upside potential for the stock seems to be quite limited. Those investors who think the stock can push past the high $2 mark may be a bit naive. The current economic situation gets bleaker by the day. The recent volatility in the equity markets weighs negatively on consumer confidence. Investors will continue to pull cash out of the market and move into safe investment vehicles (no pun intended). Besides taking value out of consumer's portfolio, discretionary spending is likely to be kept in check. The so-called Wealth Effect will take its toll, i.e. consumers are likely to feel more constrained and in turn pull back on spending.
Some of its liquidity ratios are quite disconcerting. The company is leveraged to a degree, which has put some pressure on its financial position. Sirius is sitting on a solid cash position, with a recently declining receivables turnover ratio. Both are encouraging signs. However, its consistently poor quick and current ratios have me worried. Should an economic downturn hit the economy, SIRI could be in tough spot. Its sizable debt position may hinder growth should the increase of new subscribers ease or older customers threaten to leave, which may lead to paying less.
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Looking overseas, Europe is basically on the brink of slipping into a recession. Contagion fears coupled with views that the overall banking system may be in danger are roiling markets as we speak. While the immediate effects might not be felt, further down the road consumers are going to pull back. European car companies are likely to be the first to feel the effects of slowing growth. As car sales begin to slump, subscriptions are likely to fall along with them. The chart below shows car sales in the US.
Staying with the overseas argument, the devastation from the earthquake in Japan is still being felt. Supply chain disruptions are hindering out auto imports, clearly evident in the charts below. As our imports from Japan slow, particularly that of automobiles, SIRI is going to have a tougher time bringing in revenue.
Looking overseas, Europe is basically on the brink of slipping into a recession. Contagion fears coupled with views that the overall banking system may be in danger are roiling markets as we speak. While the immediate effects might not be felt, further down the road consumers are going to pull back. European car companies are likely to be the first to feel the effects of slowing growth. As car sales begin to slump, subscriptions are likely to fall along with them. The chart below shows car sales in the US.
Staying with the overseas argument, the devastation from the earthquake in Japan is still being felt. Supply chain disruptions are hindering out auto imports, clearly evident in the charts below. As our imports from Japan slow, particularly that of automobiles, SIRI is going to have a tougher time bringing in revenue.
Technically, the stock faces quite a bit of resistance in the near future. Sirius has unsuccessfully tested the $1.93ish level twice and bounced right back down. Should it surpass this level, the $2.03 level (50% retrace from May highs) is the next level. The early August decline was coupled with heavy volume which suggests a new lower trading range for the stock. The appreciation in the price has been met with lower volume, suggesting the recent rally could fade in the coming days.
The purpose of this article was to state an unbiased position on the company. I do think its innovations and ideas are positive and the numbers are backing that up. I do not deny the overall appeal that the radio itself offers. However, my concern lies with future growth prospects. Should the economy dip into a recession, SIRI could drop down to $1 or so. If discretionary spending falls, who's to say subscribers won’t threaten to cancel their subscriptions? Auto sales have been quite stagnant, supporting the thesis of reduced consumer spending. All in all, I suggest taking a step back and evaluating one's current position. Thinking about reducing your investment may be a prudent move.
The purpose of this article was to state an unbiased position on the company. I do think its innovations and ideas are positive and the numbers are backing that up. I do not deny the overall appeal that the radio itself offers. However, my concern lies with future growth prospects. Should the economy dip into a recession, SIRI could drop down to $1 or so. If discretionary spending falls, who's to say subscribers won’t threaten to cancel their subscriptions? Auto sales have been quite stagnant, supporting the thesis of reduced consumer spending. All in all, I suggest taking a step back and evaluating one's current position. Thinking about reducing your investment may be a prudent move.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
