Revised In-Car Pricing And Digital Ads Will Unlock Potential

Key Takeaways

• A low-cost ad-supported tier and exclusive programming aim to attract price-sensitive customers and reduce churn, potentially increasing subscription revenue.
  
• Expansion in the used car market and advancements in digital advertising could drive revenue growth and improve earnings margins.
  
• Potential tariff impacts on auto sales, flat advertising performance, and equipment revenue challenges pose risks to revenue growth and net margins.

Catalysts

Operates as an audio entertainment company in North America.

• SiriusXM's strategic focus on its core in-car audience and introduction of new pricing structures, including a low-cost ad-supported tier, could increase subscription revenue by attracting more price-sensitive customers and reducing churn.
  
• Enhancements in customer satisfaction and engagement through value-added content and exclusive programming are expected to bolster revenue growth by increasing net adds and retaining existing subscribers despite recent price hikes.
  
• Expansion plans in the used car market and further integration of newer technologies like the 360L product in vehicles are anticipated to drive revenue growth by increasing penetration rates.
  
• Initiatives in digital advertising, podcasting growth, and programmatic advertising advancements could positively impact net margins by diversifying revenue streams and enhancing targeting capability, potentially increasing overall advertising revenue.
  
• Ongoing cost optimization and strategic investments in technology, including leveraging AI for operational efficiency, are likely to result in improved earnings margins, supporting sustainable financial performance amidst potential macroeconomic challenges.

Sirius XM Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sirius XM Holdings's revenue will decrease by 0.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from -19.3% today to 12.6% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $3.15) by about May 2028, up from $-1.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.2 billion in earnings, and the most bearish expecting $943.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.6x on those 2028 earnings, up from -4.4x today. This future PE is lower than the current PE for the US Media industry at 15.4x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.52%, as per the Simply Wall St company report.

Sirius XM Holdings Future Earnings Per Share Growth

Risks

• The announcement of potential tariff-related impacts on auto sales introduces a risk of reduced subscriber acquisition, which could impact long-term revenue trends.
  
• Advertising revenue remained mostly flat, showing signs of macro pressure in the digital ad market, which could lead to stagnation in revenue growth if the trend continues.
  
• Equipment revenue fell 18%, attributed to changes in chipset costs and OEM production schedules, indicating a potential risk to net margins if such challenges persist.
  
• A decline in total revenue by 4% from the previous year due to modest subscriber declines and softer advertising trends highlights a possible negative impact on overall earnings.
  
• Free cash flow was down from the prior year period, primarily driven by timing of payments and higher capital expenditures, which may exert pressure on future net margins.

Valuation

• The analysts have a consensus price target of $23.5 for Sirius XM Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $30.0, and the most bearish reporting a price target of just $16.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $8.5 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 7.6x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $21.47, the analyst price target of $23.5 is 8.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.