Worried investors are pricing in far more fear than is merited of the ever-evolving audio entertainment company.
Down more than 60% from their 2018 peak and still within sight of the 12-year low reached earlier this month, the idea of scooping up shares of Sirius XM Holdings (SIRI 13.87%) at this time is more than a little daunting. It's tantamount to catching a falling knife -- something you typically don't even want to attempt due to the obvious danger.
And yet, there's actually a three-pronged bullish case to be made for doing exactly that sooner than later. It's just not an argument everybody will want to consider.
Three reasons to buy Sirius XM stock like there's no tomorrow
Sirius XM is the result of 2008's merger of satellite radio outfits Sirius and XM, which combined their collective reach into a single dominant name at a time when internet-based alternatives were starting to get real traction.
The combined company continued to do well enough past that point, too, growing its customer base to a peak of just under 35 million paid subscribers by late 2019. Being able to leverage the draw of celebrities like Howard Stern, Kevin Hart, several exclusive sports commentators, and a slew of artist-specific and genre-specific music channels helped tremendously.
As could have been predicted though, technology continued evolving enough to disrupt the business. Subscribers are gradually canceling -- or never signing up in the first place -- because they've got access to a range of alternatives like Apple Music and (now Sirius-owned) Pandora. More and more cars are connected, too, or at least connectable to drivers' smartphones capable of piping in digital content into a vehicle's audio system. End result? As of March of this year, Sirius XM's subscriber base has slipped to 33 million.
The market saw this headwind coming, of course. That's why shares peaked nearly six years ago and began what would ultimately turn into a lengthy, turbulent pullback.
Except, the sellers have arguably overshot their target. And you can use their misstep to your advantage. You'll want to do so, in fact, for three stand-out reasons.
1. The stock is cheap
Sirius XM may be facing more than a few earnings-pinching competitive challenges these days. The stock, however, more than fully reflects this risk. Shares are presently priced at only 10 times this year's projected per-share earnings of $0.30, and a little less than 10 times next year's earnings estimate of $0.32 per share. That's cheaper than the stock's been since XM and Sirius merged.
And analysts agree with this valuation-based argument, for the record. Their current consensus price target is $3.93, which is more than 30% above the stock's present price.
2. The dividend is attractive (and protected)
The stock's prolonged weakness has led to another compelling outcome -- it's inflated the dividend yield. Sirius XM's forward-looking dividend yield roughly stands at a respectable 3.6%. That's based on a quarterly dividend, by the way, that's been raised every year since it began paying them in 2016. The growth streak isn't apt to be upended anytime soon.
It's also worth pointing out that despite the obvious headwinds, this payout remains readily funded. Only about one-third of Sirius XM's earnings are dished out to shareholders in the form of dividends, leaving it plenty of wiggle room. The company's cash flow and net income are also holding surprisingly steady in light of its challenges.
3. Sirius XM has a future
Last but certainly not least and contrary to a common assumption, Sirius XM isn't doomed due to the advent of more convenient alternative forms of audio entertainment.
That's not to say this future will be easy. The company's easiest and highest-growth days are certainly in the past.
Sirius XM recognizes the market is changing, however, and is doing something about it. The creation of internet-accessed (as opposed to satellite-delivered) audio content is one of these initiatives. The acquisition of Pandora is another. The recent launch of Unified ID 2.0 is still another, allowing its ad-supported programming's advertisers to more precisely target customers in an environment that's obscuring web users' unique digital footprints. The company also recognizes the importance of being able to leverage the exclusivity of its on-air celebrities like the aforementioned Howard Stern. Its existing customer base makes it a preferred place for established names to launch their podcasts and shows, which keeps consumers interested and willing to pay for Sirius XM service.
The stock's ongoing sell-off suggests most investors just don't see -- or at least don't fully appreciate -- this dynamic yet.
Sirius XM stock isn't right for everyone, but...
Still, it's not a great pick for everyone's portfolio. If you're looking for huge growth, for instance, it's probably not for you simply because there's little to none of it on the horizon. The audio entertainment business is already a crowded one in all corners. It's also not an ideal pick for income-minded investors who can't stomach more than a little volatility. This ticker's apt to remain all over the map even if it mostly sees bigger-picture upside from here.
If you're looking for above-average income from an undervalued, underpriced stock, though, Sirius XM is a compelling idea for anyone who already owns one or two less volatile dividend payers.
Just don't tarry. Other investors may start to figure all of this out soon.
James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.
