The soaring stock of SiriusXM has taken a hit following downgrades from two Wall Street analysts who have reevaluated the company’s high valuation.
On Friday morning, SiriusXM stock (ticker SIRI) dropped 7.8% to $7.20 after skyrocketing 42% on Thursday to reach $7.81. The surge in stock price resulted from a combination of short covering, the unwinding of an arbitrage trade involving Liberty SiriusXM (LSXMA), and potential buying ahead of a Nasdaq 100 rebalancing. However, even with the recent pullback, the stock has nearly doubled in value over the past month.
One analyst, Jeff Wlodarczak from Pivotal Research Group, downgraded SiriusXM to Sell from Hold. In a note to clients, Wlodarczak expressed concerns about the company’s trading multiples. He stated, “SIRI shares are now trading at 15X EBITDA (30X free cash flow) for an entity we expect to show a (-9%) decline in EBITDA in ’23 and low single-digit EBITDA CAGR thereafter.” Wlodarczak did raise his price target slightly to $4.50 from $4.
On the same note, Seaport Research Partners analyst David Joyce also reduced his rating on the stock to Sell from Neutral, citing valuation. While he acknowledged that trends may improve, he argued that they will not do so to the extent reflected in SiriusXM’s current valuation. Joyce set a price target of $4.50 for the stock.
In terms of valuation, SiriusXM appears to be more highly valued compared to similar companies. After Thursday’s impressive rally, the company’s market capitalization was approximately $30 billion, accompanied by around $9 billion of debt. Management projects earnings before interest, taxes, depreciation, and amortization (EBITDA) of about $2.75 billion for this year, which aligns closely with 2022 figures. This places the enterprise value, including market capitalization and debt, at 15 times EBITDA.
In stark contrast, top cable and broadband providers Comcast (CMCSA) and Charter Communications (CHTR) are valued at approximately seven times the projected 2023 EBITDA.
While SiriusXM experiences a setback due to recent downgrades, industry experts will be closely monitoring its future performance to see if it can rebound from the dip and maintain its impressive growth trajectory.
The Rise of SiriusXM Stock and its Market Dynamics
The surge in SiriusXM stock can be attributed to two main factors: the limited availability of shares in the market and a substantial short interest. A majority ownership of approximately 83% is held by Liberty Media, which has converted this stake into a tracking stock, known as Liberty SiriusXM. While holders of tracking stocks benefit from the asset’s economic performance, they do not possess direct ownership.
An analysis of recent short interest reveals that approximately 220 million shares are involved, representing around one-third of the publicly available shares. This ratio is one of the highest among the companies listed in the Russell 1000 index. Due to this significant short interest, the cost associated with borrowing SiriusXM stock has escalated significantly.
Numerous hedge funds have engaged in a trade strategy involving long positions in Liberty SiriusXM and short positions in SiriusXM. Their aim is to capitalize on the anticipated narrowing of the spread, which stood at around 35% in June – in line with historical averages. The trade is often referred to as “eternal” due to its enduring nature. However, history has shown limited success for investors undertaking this strategy.
The intended catalyst for the predicted narrowing of the spread is Liberty’s plan to split the Liberty SiriusXM tracking stock into two separate trackers. One tracker will be linked to Liberty Media’s SiriusXM holding, while the other will represent a 30% stake in Live Nation (LYV), currently held within Liberty SiriusXM. The scheduled split is expected to take place in early August.
Contrary to expectations, instead of narrowing, the spread has experienced a significant expansion, reaching approximately 60% on Thursday as the value of SiriusXM stock surged.
Benchmark analyst Matthew Harrigan has observed this specific pairs trade between Liberty SiriusXM and SiriusXM’s stock to be ongoing and challenging to predict. Investors have been attempting this trade for years but often have limited success.
Reflecting the apparent unwinding of the trade, with selling of the tracking stock and buying of SiriusXM, Liberty Sirius remained relatively unchanged on Thursday, trading at $34.57 per share. In contrast, SiriusXM’s largest asset experienced a 42% increase in value. On Friday, Liberty SiriusXM faced a marginal decline of 1.5%, closing at $34.07.
The volatile trading activity surrounding SiriusXM stock highlights the significant market fluctuations that can occur when large short positions are involved in stocks with limited availability.
