By Michael Elkins
Rosenblatt Securities “partially” downgraded their exposure to SiriusXM, taking Sirius XM shares (NASDAQ:SIRI) to a Neutral rating (from Buy), but keeping controlling shareholder Liberty Media Corp SiriusXM (NASDAQ:LSXMK) (which trades on SIRI sentiment) at Buy.
New and used car sales are a key driver of subscription growth at SiriusXM. With sales continuing at a subpar level, SiriusXM is guiding for a modest decline in subs for 2023, with revenues flat, EBITDA down 5% and free cash flow down a third.
Other near-term headwinds impacting the company are one-time nearly $100 million step-ups on royalties for pre-1972 songs, a 9% CPI inflator for streaming music fees, and a step-up in capex for new satellite launches through 2027, after which SiriusXM will consolidate into one satellite fleet from two and satellite capex will drop substantially.
CEO Jennifer Witz recently made comments that are consistent with long-standing bear stances that generationally consumers will tend to turn away from satellite radio and towards other streaming services. Witz went on to say that younger consumers were also churning at higher rates because they want more "personalization and more control over their listening experiences."
Over time, more and more sports (a big draw for SiriusXM) will also move to streaming. Examples include Apple (NASDAQ:AAPL) taking Major League Soccer, Amazon (NASDAQ:AMZN) hosting Thursday Night Football, and Google (NASDAQ:GOOGL) stepping up for The Sunday NFL Ticket. This prompts Rosenblatt to assume churn rates tick up over time, and that sub growth, while returning over time to a positive number, will be much less than formerly assumed, and that ARPU growth will also be a little less.
Analysts wrote in a note, “Liberty Sirius would be over 50% higher if it's 82% holding of SiriusXM were marked at its trading level. That's eased from a recent spike but is still above the past average of 38%. The pending spin-off of Liberty Sirius' Live Nation stake should help compress that discount. Ultimately, a combination of SIRI and LSXM would eliminate it. At some point, we expect that to happen, making Liberty Sirius a call option on capital structure optimization.”
Shares of SIRI and LSXMK are down 0.67% and 0.60%, respectively in afternoon trading on Wednesday.