Sirius XM: The Competition Is Too Fierce

seekingalpha02-23

Sirius XM's financials suggest the company is overvalued and may struggle to rejuvenate growth and improve margins.The company faces intense competition from streaming giants like Spotify, Apple Music...

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Dirsett
03-13
Dirsett
Buffet recently added more shares in SIRI.Maybe he sees something in the comlpany that you missed.?

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on the whole audio-streaming competitive landscape, which may sound a little biased, however, without further proof that the company can rejuvenate its growth and improve margins, I believe the company is overvalued, and from the perspective of a person who has no money in the company, it is not a good time to start a position now. Briefly on the Company Sirius XM is a provider of satellite and online radio in the US and Canada. It was formed in 2008 when the two largest satellite radio providers merged, Sirius and XM. The company provides 400 channels, where you can listen to ad-free music, talk shows, and live play-by-play sports coverage of all major sports leagues. The channel offers exclusive content for your car system, phone, and computer. The content requires a subscription service and to keep up with the times, SIRI is investing in streaming, a non-linear format that is very popular nowadays with the younger generation. The company's streaming app just started rolling out in December of last year and is gaining traction and its Pandora streaming service is losing market share to the big streaming platforms like Spotify (SPOT), Apple Music (AAPL), and YouTube Music (GOOG). Financials As of FY23, the company had around $216m in cash and equivalents against a whopping $8.7B in long-term debt. That's a decent amount of debt, however, is it something to worry about? I like to look at a few solvency metrics to help me decide whether the company is overindulging on leverage. First, the company's debt-to-assets ratio is a little on the higher side as of FY23. It is at around 0.9, and I prefer a maximum of 0.6, so it seems it is a bit on the higher end of risk here. The second metric I like to examine is the company's debt-to-equity ratio. The company has accumulated a shareholder deficit for almost a decade now, so this metric is negative, which doesn't mean that the company is at any risk of bankruptcy. It certainly would be if the company was not good at making cash, which it is in this case, so I won't put too much weight on negative D/E. Lastly, I like to look at the company's ability to meet its debt obligation, in the form of being able to pay the annual interest expense. Here, I look for an interest coverage ratio of at least 5x, but many analysts tend to agree that a ratio of just 2x is sufficient. I like to be more conservative and prefer a 5x because it allows for bad years of performance when EBIT drops significantly y/y, but if the coverage ratio is at 5x, then bad years shouldn't affect the ability to pay the annual interest expense. The ratio at the end of FY23 stood at around 4.8, so doesn't seem to have trouble paying its obligations. Furthermore, its cash from operations has been at around $2B, so that is a good cushion in my opinion. The company's current ratio is not the best. It has been operating with a current ratio of 0.3 for at least the last 5 years, so it may not be of any risk, because it's been like this for a while, and about half of those current liabilities are deferred revenues, which is revenue that is received but because of the company's subscription-based nature, not recognized as such because the subscriptions are annual usually. Current Ratio (Author) So far, in terms of liquidity and solvency, it's not looking particularly great, which means I will be aiming for a higher margin of safety when it comes to its valuation in the later section. Now, let's look at the company's efficiency and profitability in more detail. SIRI's GAAP margins have been relatively stable, with gross margins seeing a slight decrease over the last couple of years, while EBIT and net margins have performed better. It looks like the company is maintaining its efficiency relatively well, which is better than a declining trend. Margins (Author) Looking further at efficiency, the company's return on assets has been decent also throughout the years, hovering at around 12% and well above my minimum of 5%. It seems that the management is good at utilizing the company's assets. Furthermore, the company's return on total capital measures how well the management is allocating total capital to profitable projects. In other words, measures the company's profitability. I usually look for at least 10%, which tells me that the company has a strong moat and a competitive advantage. SIRI's ROTC stood at around 19% as of FY23, which is impressive. No point in comparing the company's ROTC to competitors since SIRI is the only major satellite radio provider out there right now. ROTC and ROA (SA) In terms of revenues, SIRI has done decently in the past, but ever since the competition of people's ears came out in the form of streaming with the likes of Spotify, Apple Music, and YouTube Music, the growth has slowed down considerably, and it doesn't look like it'll be coming back anytime soon. Analysts are expecting around 1%-2% growth going forward, with -2% for FY24. The company needs to come up with some initiatives that would invigorate its top line. Revenue is stagnating (Author) Overall, the financials are somewhat of a mixed bag. The high debt figures balanced out with great cash flow and decent margins, but no growth in revenues. This mixed bag will demand a higher discount on the company's valuation model. Comments on the Outlook So, we don't know how long the company is going to survive in such a competitive market. The company needs to compete with juggernauts like the aforementioned Big Three for people's ears and it is not going to be easy. The audience is getting younger and more tech-savvy, which means everything needs to be advanced, and most will be using their phones to stream whatever they want to listen to. I'm not saying that there is no place for satellite radio in this world anymore, but it is getting harder and harder to maintain the market share. People in metropolitan areas are most likely will be using the streaming services that they must have been paying for years now. I've been using Spotify Premium since 2012 and I don't see this changing any time soon. Every time I am in my car, I connect to my Spotify account, and the only time that would fail is if I am on a long road trip where a network connection is non-existent. And even then, I had a large library of podcasts or albums downloaded because the radio stations were no good in my opinion. Many places are more rural and satellite radio comes in handy, so SIRI may maintain that niche until there is much better connectivity all around the globe, but the continual investment in satellites tells me that the company is still very positive about its future. The company's efforts of rebranding to appeal to the younger audiences are still in their very early stages and will need to prove it is going to take the market share away from the mentioned streaming giants, however, that is the initiative I like to see from a company that could have become extinct if it stays where it is. In my opinion, the streaming app is the only one that will matter in the end, and what sets SIRI apart from the other streaming platforms is the focus on the in-house production of shows. New shows with celebrities like John Mayer have done extremely well, as well as the world of podcasts is getting very popular globally, so I believe that further focus on this type of content will attract a certain group of people, a niche, that will be sustainable and profitable, but that is just my view on where the company should go because I don't think it is going to be easy to compete against the more established music streaming platforms out there. On top of that Spotify's extensive podcast library is also one big obstacle that SIRI needs to overcome if the company is going to go the route of original content creation. I don't believe listeners are quick to change which platform to use. I currently have YouTube Premium and yet I do not use YouTube Music as the app is just not what I'm used to. The time and effort put into the customization of my subscription on Spotify is too great even if another platform might be cheaper overall. I don't think I'm the only one on this. So, that is going to be a big challenge to overcome if SIRI is going to take market share away from established players like SPOT. Some services help with bringing your playlists across to other platforms, but I don't think they help with the customization that your current platform offers you via learning what you like to listen to and recommend something new to discover. In short, I may be biased, but the company will have to prove it can return to growth with its new streaming initiative to stay relevant and a strong competitor to the more established music streaming platforms that already take so much of people's listening time. The company's streaming platform Pandora has been very popular in the past and still boasts quite a lot of subscribers, however, according to Statista, which projected that the number of active users will fall to around 49m by '23, we can see from the report here that the number of active users is around 46m, so the company is losing users at a higher pace than originally modeled. By comparison, Spotify was projected to have around 100m active users by ´23 but ended up having around 114m. Valuation As I mentioned earlier, analysts aren't expecting much growth, which makes sense. They can't hope that the new growth initiatives will work out great, we need to see proof before assigning higher top-line growth estimates. Therefore, I went with around 1% CAGR over the next decade for the base case. To give myself a range of possible outcomes, I also modeled a more optimistic case and a more conservative case. Below are those estimates and their respective CAGRs. Revenue Assumptions (Author) In terms of margins and EPS, I went with conservative numbers too. Gross margins will see an improvement of around 200bps over the next decade, which I think is achievable. EPS will grow at around 2% on average just to be on the safer side, which will provide me with more room for error, and will act as more margin of safety. Below are those estimates. Margins and EPS assumptions (Author) For the DCF model, I went with the company's WACC of around 7.3% as my discount rate and 1.5% as my terminal growth rate. Furthermore, I added another 15% discount to the intrinsic value calculation, just to be completely protected from the downside. With that said, SIRI's intrinsic value is around $3 a share, which means it is quite overvalued in my opinion, and would not be a good time to start a position right now. Intrinsic Value (Author) Closing Comments From the perspective of a person who has no capital committed to the company, it is not a good time to start any position, therefore, I am assigning a hold rating, until it drops to around 3 bucks or the company is part of the Liberty Media Group already, as that company seems to be a better deal, with many analysts confirming it. I have not looked at the other company in detail, but all three ratings suggest either a buy or a strong buy. The company's share price has seen a lot of volatility and has underperformed in general. You could hope for another short squeeze again as we saw in mid-July '23, but that is not investing, and I don't see this happening anymore. I am staying away from the stock until I see how the transformation evolves in the near future, as I would like to see how well the rebranding and refocus will do.  The competition is very fierce and will take a lot of effort to appeal to the younger audience and regain market share, if that is even possible. The unique content that the company offers is appealing and could pivot itself more toward that niche of podcasts and more original content, but that content truly has to be unique and the only place top find it would on this platform.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":283667781308480,"gmtCreate":1710293779726,"gmtModify":1710293783406,"author":{"id":"3560400579582064","authorId":"3560400579582064","name":"Dirsett","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":9,"crmLevelSwitch":0,"idStr":"3560400579582064","authorIdStr":"3560400579582064"},"htmlText":"Buffet recently added more shares in SIRI.Maybe he sees something in the comlpany that you missed.?","listText":"Buffet recently added more shares in SIRI.Maybe he sees something in the comlpany that you missed.?","text":"Buffet recently added more shares in SIRI.Maybe he sees something in the comlpany that you missed.?","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/283667781308480","repostId":2413758241,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":0,"commentSize":1,"repostSize":1,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2413758241"}