SiriusXM Stock Drops After Surge. What’s to Blame.

Pivotal Research Group analyst Jeff Wlodarczak downgraded SiriusXM to Sell from Hold. 

“SIRI shares are now trading at 15X EBITDA (30X free cash flow) for an entity we expect to show (-9%) decline in EBITDA in ’23 and low single digit EBITDA CAGR thereafter,” Wlodarczak wrote in a client note. He did lift his price target to $4.50 from $4. CAGR refers to compound annual growth rate.

Barron’s wrote about the surge in SiriusXM stock on Wednesday and Thursday.

Seaport Research Partners analyst David Joyce cut his rating on the stock to Sell from Neutral, citing valuation. He wrote that trends “are likely improving from here, but not to THAT degree.” He has a price target of $4.50.

Here are the numbers on SiriusXM, showing it is more highly valued than comparable companies.

After Thursday’s run-up, which capped a rally that began in June, SiriusXM was valued at about $30 billion with roughly $9 billion of debt. Its earnings before interest, taxes, depreciation, and amortization, or Ebitda, are expected to be about $2.75 billion this year, based on management’s guidance, little changed from 2022. That means the company’s $40 billion in enterprise value—market capitalization plus debt—is 15 times Ebitda.

By contrast,

Comcast

(CMCSA) and

Charter Communications

(CHTR), two of the top cable and broadband providers, are valued at about seven times projected 2023 Ebitda.

Management says

Sirius XM
’s
free cash flow is expected to fall to $1.1 billion in 2023 from about $1.6 billion in 2022 on higher capital spending. The company has about 34 million subscribers to its satellite radio business and also owns Pandora, the music streaming business.

The run-up in SiriusXM stock has been fueled by the thin float in the stock and heavy short interest. Liberty Media owns roughly 83% of the company and has effectively put that stake into a tracking stock, Liberty SiriusXM. Trackers give holders the economics of the underlying assets but not direct ownership.

The recent short interest of about 220 million shares was roughly a third of the public float, one of the highest ratios in the Russell 1000 index. Reflecting the heavy short interest, the cost of borrowing the stock has been very high.

Many hedge funds have engaged in a trade in which they were long Liberty SiriusXM and short SiriusXM, betting that the spread, which stood at around 35% in June, in line with its historic average, would tighten.

The hoped-for catalyst is Liberty’s plan to split the Liberty SiriusXM tracking stock into two trackers, one linked to Liberty Media’s SiriusXM holding and another to a 30% stake in Live Nation (LYV) which has been housed inside Liberty SiriusXM. The split is due to take place in early August.

Some investors figured that the simplification would narrow the spread, but instead it has blown out, hitting about 60% Thursday, as SiriusXM stock took off.

Benchmark analyst Matthew Harrigan referred to the Liberty SiriusXM/SiriusXM pairs trade as “eternal.” Investors have been playing that trade, generally with little success, for years.

Reflecting apparent unwinding of the trade, with selling of the tracking stock and buying of SiriusXM, LibertySirius was little changed Thursday at $34.57 even though its largest asset, SiriusXM, was up 42%. Liberty SiriusXM was down 1.5% Friday at $34.07.

The wild trading in SiriusXM stock shows the volatility that can result from big short positions in thin-float stocks.  

Write to Andrew Bary at [email protected]