The recent surge in SiriusXM stock has been met with skepticism from Wall Street analysts, leading to a partial reversal in its gains. On Friday, the stock (ticker SIRI) experienced a 7.8% decline, reaching $7.20, following a remarkable 42% increase the previous day. The sudden rise in stock value was fueled by several factors, including short covering, the unwinding of an arbitrage trade involving Liberty SiriusXM (LSXMA), and potential buying ahead of a Nasdaq 100 rebalancing. Despite the recent setback, the stock has still managed to nearly double in value over the past month.
Analyst Downgrades and Valuation Concerns
Pivotal Research Group analyst Jeff Wlodarczak downgraded SiriusXM from Hold to Sell. In a client note, Wlodarczak expressed concern about the company’s valuation, stating that its shares are currently trading at 15 times EBITDA (30 times free cash flow). He expects a decline of 9% in EBITDA in 2023, followed by low single-digit EBITDA compound annual growth rate (CAGR) thereafter. Although Wlodarczak increased his price target to $4.50 from $4, the downgrade reflects his pessimism regarding SiriusXM’s future performance.
Another analyst, David Joyce from Seaport Research Partners, also downgraded the stock from Neutral to Sell, citing similar concerns about valuation. While he believes that trends may improve, he does not anticipate the degree of growth seen recently. Joyce maintains a price target of $4.50.
When comparing SiriusXM to similar companies, the data reveals a high valuation for the satellite radio firm. Following the recent rally and subsequent market cap growth since June, SiriusXM is currently valued at approximately $30 billion, with a debt of approximately $9 billion. Based on management’s guidance, the company’s expected EBITDA for this year is around $2.75 billion, remaining relatively unchanged from 2022. Consequently, SiriusXM’s enterprise value, which includes market capitalization plus debt, stands at 15 times EBITDA, reaching a total of $40 billion.
In contrast, top cable and broadband providers such as Comcast (CMCSA) and Charter Communications (CHTR) have a projected 2023 EBITDA multiple of around seven.
SiriusXM Stock Soars Amid High Short Interest
The soaring stock price of SiriusXM has been primarily driven by the low number of available shares in the market and a significant amount of short interest. Liberty Media, the majority owner of the company, has essentially converted their stake into a tracking stock called Liberty SiriusXM. Although trackers offer holders the benefits of underlying assets, they do not provide direct ownership.
Currently, the short interest in SiriusXM sits at around 220 million shares, which is roughly one-third of the public float. This makes it one of the highest short interest ratios in the Russell 1000 index. Due to this heavy short interest, the cost of borrowing SiriusXM stock has been incredibly high.
Hedge funds have taken advantage of this situation by employing a trading strategy that involves being long on Liberty SiriusXM and short on SiriusXM. The expectation was that the spread, which was approximately 35% in June (consistent with historical averages), would narrow.
The catalyst for this trade is Liberty’s plan to divide 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. The split is scheduled to occur in early August.
Initially, investors believed that this simplification would lead to a reduction in the spread. However, instead of tightening, the spread has widened and reached about 60% on Thursday as the price of SiriusXM stock skyrocketed.
Benchmark analyst Matthew Harrigan has referred to the Liberty SiriusXM/SiriusXM pairs trade as “eternal.” For years, investors have engaged in this trade with limited success.
As the trade appears to be unwinding, with investors selling the tracking stock and buying SiriusXM, Liberty SiriusXM has experienced minimal change in its stock price. On Thursday, it closed at $34.57, despite SiriusXM’s substantial 42% increase. On Friday, Liberty SiriusXM dropped 1.5% to $34.07.
The extreme volatility in SiriusXM stock demonstrates the potential consequences of significant short positions in stocks with a limited number of shares available.