Sirius XM (SIRI) Must Navigate Numerous Hurdles This Year, But Its Long-Term Future Remains Bright
2:29 pm Monday, April 18th, 2022
Sirius XM (SIRI) is heading downstream after being hit with an analyst downgrade at Morgan Stanley today. Ongoing headwinds within the automotive industry were cited as reasons for the downgrade to Underweight from Equal-Weight. Some profit-taking is also on the table, as shares of the satellite radio and audio streaming company, which owns SiriusXM and Pandora, have recently outperformed the broader market, having added slightly over 1% YTD as of Friday’s close.
SIRI’s recent momentum aside, the stock has been on a rollercoaster for much of the past year. As its short interest stood at over 25% as of the end of March, volatility was to be expected. The numerous obstacles that remain this year could cause that volatility to endure.
Even though SIRI diversified itself beyond satellite radio offerings through its 2019 acquisition of streaming service Pandora, over 80% of its $8.2 bln in FY21 revenue was still generated from SiriusXM subscription fees, led by its in-car offerings. Supply chain challenges have disrupted auto production in recent periods. While some automakers saw supply chain improvements qtr/qtr in Q1, new disruptions, like lockdowns in China, could prolong or even exasperate the current supply/demand imbalance. As an example, the largest auto manufacturer globally by units shipped, Toyota Motor (TM), aims to lower production by 10% in May due to supply chain problems.
Furthermore, price inflation combined with rising interest rates is taking a toll on the used auto market. Used vehicle retailer CarMax (KMX) saw a 5.2% decline in retail used vehicle unit sales yr/yr in Q4 (Feb); consumers pulled back spending as interest rates continued to climb while average selling prices jumped nearly 40%. As most vehicles built after 2006 are equipped with satellite radio connectivity, a slowdown in pre-owned automobile demand affects SIRI’s potential new subscriber base.
SIRI also competes against several alternative applications, including traditional AM/FM radio. Satellite radio rarely loses a signal, unlike internet and analog-based alternatives, giving it a competitive advantage, but this advantage may not be enough to overcome the dozens of podcasting, music streaming, and audiobook apps on the market. Pandora may already be feeling those competitive pressures; it saw an 11% drop in monthly active users (MAUs) yr/yr in FY21.
Bottom line, SIRI faces a series of hurdles this year that, when combined with the stock’s relatively high short interest of 25%, call for a significant degree of caution be employed when trading on it in the short term. However, SIRI was embedded in over 82% of new vehicles as of last year, up from an already impressive 78% in FY20. Also, the company exited FY21 with slightly over 25% of SiriusXM-equipped vehicles incorporating 360L, which combines streaming and satellite content. Even though many consumers may opt out of SiriusXM, this degree of penetration gives SIRI an excellent jumping-off point once automaker supply chains begin normalizing.
