Sirius XM trades at $26.83 per share and has stayed right on track with the overall market, gaining 8.5% over the last six months. At the same time, the S&P 500 has returned 9.7%.
Is now the time to buy Sirius XM, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Sirius XM Will Underperform?
We’re passing on Sirius XM for now. Here are three reasons we avoid SIRI, plus one stock we’d rather own.
1. Long-Term Revenue Growth Flatter Than a Pancake
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, Sirius XM struggled to consistently increase demand as its $8.60 billion of sales for the trailing 12 months was close to its revenue five years ago. This was below our standards and signals it’s a low quality business.
2. Cash Flow Margin Set to Decline
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Over the next year, analysts predict Sirius XM’s cash conversion will slightly fall. Their consensus estimates imply its free cash flow margin of 18.2% for the last 12 months will decrease to 17%.
3. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
Unfortunately, Sirius XM’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Sirius XM, we’ll be cheering from the sidelines. That said, the stock currently trades at 8.4× forward P/E (or $26.83 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. Let us point you toward one of our all-time favorite software stocks.
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