After SiriusXM turned in a mixed fourth quarter financial performance and lowered its 2023 guidance, Pivotal Research has downgraded its expectations for the satellite broadcaster. In a note to clients, analyst Jeff Wlodarczak says he has “materially reduced” his outlook for subscriber, revenue, and free cash flow expectations for 2023 and beyond. Pivotal Research also cut the company’s earnings multiple from 11-times to 10-times.
Moreover, the Wall Street research firm has lowered its 2023 year-end target price on shares of “SIRI” from $6.75 per share to $5.00. “Our view is that the shares are fairly valued at current levels and that SIRI will be a much more interesting investment story closer to ’24 as free cash flow begins to reaccelerate and auto production (hopefully) starts to normalize,” Wlodarczak says. He’s keeping his “hold” rating on the stock and contends that shares of Liberty Media Corp., which owns 81% of SiriusXM, “remains a more attractive way to play SIRI.”
The company added 162,000 self-pay subscribers in its core satellite radio service in the fourth quarter but warned analysts of a “modest” drop this year due to sluggish car sales and economic headwinds.
While the satcaster brought in more self-pay subscribers in Q4 than expected, revenue was worse than Pivotal anticipated. Earnings and free cash flow were “materially higher” than expected, mainly due to a 30% cut in marketing spend. That said, it’s what lies ahead that has Pivotal concerned. During its fourth quarter and full year 2022 earnings call, SiriusXM management warned of still weak auto production and less spending on marketing while they wait for a major upgrade in their digital streaming platform in the second half. Pivotal was expecting a 960,000 increase in subs this year but management instead said it is on track to lose self-pay subscribers this year. In addition, management’s 2023 guidance fell short of Pivotal’s projection in three key metrics. SiriusXM is forecasting $9 billion in revenue this year while Pivotal pegged the number at $9.253 billion. The company is calling for 2% earnings growth to $2.7 billion; Pivotal wanted a 3% boost to $2.86 billion.
The two were also out of synch on free cash flow with SXM’s $1.05 billion forecast “well below” Pivotal’s $1.45 billion forecast. “The variance between our original subscriber estimates and their forecasts are reflective of automakers not ramping production materially as they (for now) appear focused on maintaining relatively high margins that emerged on lower production during the pandemic/chip shortage (which we assume could be an overhang for several years partly offset by likely increasing used car sales post ’23),” Wlodarczak says. With SiriusXM making deep cuts in marketing, he worries about higher subscriber churn “with a likely material drop in gross digital subscriber additions” in the first half of 2023.
Pivotal’s report also singles out a bunch of things that have the satcaster expecting lower earnings and cash flow this year: 1) a $100 million hit on pre-1970 music royalties and an increase in costs for certain music; 2) likely negative subscriber growth in 2023; 3) tens of millions of investment in a new digital streaming interface; 4) a $225 million capex increase to build four satellites to completely replace their satellite fleet by the end of 2026; and 5) the company becomes a full tax payer in 2023.
After digesting the company’s Q4 results and lowered guidance, Pivotal now expects SiriusXM to lose 230,000 subscribers this year, experience a 2% revenue decline, and reduce its growth forecast to -8%. On the bright side, the report suggests this year will be “the floor” and that over the next five years the company will deliver “substantial growth” as auto production ramps up and the costs to build new satellites diminish with production completed by 2026. Also on the horizon, per Pivotal: at least one price increase for subscribers in the next five years.
Read the full Pivotal Research report HERE.