Merger Adjustments And Sports Expansion Promise Growth Despite Analysts' Pessimistic Revenue And Margin Outlook

Key Takeaways

• Adjusting the merger exchange ratio and focusing on growth through car subscriptions, ad platforms, and streaming features are poised to boost stock liquidity and subscriber engagement.
  
• Formula One's revenue growth and the increasing global interest in motorsports present strong future profitability potential and broader market penetration.
  
• Fluctuating race promotion revenues, increased team payments, pivotal sponsorships, regulatory challenges, and dependency on high-profile deals pose significant risks to financial stability and growth.

Catalysts

Through its subsidiaries, engages in the entertainment business in the United States, the United Kingdom, and internationally.

• The adjustment of the merger exchange ratio to reduce the new SIRI shares by 98% is expected to enhance trading dynamics and potentially lead to index inclusion, which could improve the liquidity and attractiveness of the stock, ultimately supporting an increase in stock price.
  
• SiriusXM's focus on growth opportunities through expansion into the car with new subscriptions, the launch of an ad-supported platform, and integration of new features in streaming services are poised to boost subscriber base and engagement, contributing to revenue growth.
  
• The peak in CapEx for 2024 and the subsequent expectations for free cash flow growth in the coming years present a potential upside for earnings and provide a more attractive free cash flow multiple basis for the stock.
  
• Formula One (F1)'s significant year-to-date revenue and OIBDA growth, driven by additional races and successful scaling of partners, suggests strong future profitability potential, likely impacting net margins positively.
  
• The ongoing developments and high interest in MotoGP and F1, including new partnerships and expected transaction closures, indicate growing global interest and engagement in these sports, paving the way for increased sponsorship revenue and broader market penetration, likely boosting overall earnings.

Assumptions

• Analysts are assuming Liberty SiriusXM Group's revenue will decrease by 0.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 11.0% today to 10.3% in 3 years time.
• Analysts expect earnings to reach $920.0 million (and earnings per share of $1.28) by about September 2027, down from $978.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.7x on those 2027 earnings, up from 7.5x today. This future PE is lower than the current PE for the US Media industry at 12.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.56%, as per the Simply Wall St company report.

Risks

• There's a risk of volatility and unpredictability in revenue due to the mix of races and varying fee structures, which can lead to fluctuating race promotion revenues impacting overall financial performance.
  
• Increased team payments, as a result of contractual increases or changes in race outcomes, could compress margins and reduce net income available for shareholders.
  
• The success of sponsorships and marketing deals is crucial for revenue growth; any failure in securing lucrative deals or renewals could negatively impact future revenue streams.
  
• Regulatory challenges and compliance with antitrust laws, especially highlighted by the investigation into the refusal of Andretti's F1 entry, pose a legal risk that could impact operational freedom and financial results.
  
• Dependency on high-profile partnerships and sponsorships, such as potential deals with significant brands, if not realized or less favorable than expected, could limit growth in sponsorship revenues and overall earnings.

Valuation

• The analysts have a consensus price target of $28.0 for Liberty SiriusXM Group based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $8.9 billion, earnings will come to $920.0 million, and it would be trading on a PE ratio of 12.7x, assuming you use a discount rate of 8.6%.
• Given the current share price of $22.55, the analyst's price target of $28.0 is 19.5% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.