Some analyst downgrades matter more than others. Morgan Stanley's Benjamin Swinburne is downgrading shares of SiriusXM Radio (NASDAQ: SIRI) this week. He's lowering his rating on the satellite-radio provider from a neutral equal weight to a bearish underweight. His $7 price target implies just 8% of upside from current levels.
Swinburne's move is notable because he's been officially following the stock since 2005. He's had a pulse on the media giant before the industry-saving merger approval of Sirius and XM in 2008 and even the arrival of Howard Stern on satellite radio in 2006. He gets the popular platform, with 32 million self-pay subscribers.
It doesn't mean that he's right this time.
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Running out of gas
Swinburne's fresh concern with Sirius XM stock stems largely from the headwinds facing the automotive industry. Car sales continue to be the lifeblood of new Sirius XM subscribers, and growth has been challenging lately.
Inflation has hit the pricing of new vehicles in the new normal. The sticker shock is even worse on used cars. Supply-chain constraints have also been a pressure point for the industry in recent quarters.
Higher gas prices may also be keeping people out of their cars. We saw what happened to Sirius XM early in the pandemic -- two years ago -- when our cars were parked in our driveways. Satellite radio is a product that's primarily used in the car, and you're not as likely to pay up for premium dashboard audio if there are incentives to avoid driving.
Swinburne is lowering his estimates on Sirius XM, and he's now perched below Sirius XM's own guidance, as well as the average analyst forecast. But it doesn't mean that he's right.
You don't cover a stock for 17 years without missing here and there. He downgraded the stock 10 years ago, and Sirius XM went on to post positive shareholder returns every single year until 2020. He naturally made bullish calls during that time, but just pointing out that the timing of a downgrade from a longtime and well-respected analyst isn't always a death sentence for a stock.
Sirius XM has outlasted the naysayers. Despite the common bearish thesis that this is a transitory technology -- destined to obsolescence in this age of the connected car -- the platform continues to grow. It has added at least 1 million net subscribers in 10 of the past 11 years. Churn has remained surprisingly low, even during the darkest stretches of the COVID-19 crisis.
Sirius XM is a survivor, generating a ton of free cash flow that it's aggressively returning to shareholders through buybacks and dividends. Sirius XM is historically a media stock that you don't want to bet against, at least not for long.
Some of the current headwinds may even prove to be tailwinds. Higher gas prices may inspire drivers to trade in their older cars that lack satellite-radio receivers to more fuel-efficient rides that come with factory-installed access to Sirius XM's service. Inflation is sending prices of many streaming services higher, opening the door for Sirius XM to consider reasonable hikes. There are always silver linings for historically golden growth stocks.
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Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool recommends Sirius XM Holdings Inc. The Motley Fool has a disclosure policy.
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