With shares down around 60% over the last five years, Sirius XM (NASDAQ: SIRI) has battered its long-term investors. And it's no surprise management turned to a 1-for-10 reverse stock split to keep its shares from getting too cheap. But while the split takes Sirius out of penny stock territory , it doesn't resolve the challenges that put it there in the first place. Let's dig deeper to see what the next five years could bring.
A legal monopoly with no moat
Formed by the 2008 merger of Sirius Satellite Radio and XM Satellite Radio, Sirus XM demonstrates the fascinating nuances of American antitrust law. At face value, the combined company is a monopoly. Still, the Federal Communications Commission (FCC) approved the merger, accepting that the deal wouldn't hurt consumers because of the growing abundance of choices in the audio entertainment space.
In hindsight, the FCC's decision was spot on. Sirius XM is the only satellite radio provider available in the U.S. But it isn't able to price gouge consumers because of stiff competition from terrestrial radio stations and relatively new rivals like Apple Car Play, which allows users to connect their smartphones (full of music and podcast libraries) to their cars.
In the past, Sirius has bolstered its economic moat with exclusive content, such as The Howard Stern Show . But while it might be too early to call the influential "shock jock" washed up, his relevance has faded compared to a new breed of podcasters like Joe Rogan and Tucker Carlson, who occupy the first and second spots on Spotify 's listenership rankings. On that note, the Spotify app also works with Apple Car Play, making it a direct competitor with Sirius.
Lackluster business momentum
Sirius XM is a relatively mature company in a low-growth industry, which shows in its second-quarter earnings. Total revenue fell 3.2% year over year to $2.18 billion, but operating income increased 5.4% to $505 million because of lower expenses like office salaries and development. Perhaps the main appeal for Sirius investors is the healthy bottom line.
The company reports a free cash flow of $343 million and adjusted earnings before interest taxes, depreciation, and amortization (EBITDA) of $702 million. Management returns this money to investors through a 4.34% dividend and share buybacks -- with $1.17 billion authorized in the second quarter. Between 2012 and 2022, Sirus repurchased a whopping 3,654 shares for $16.5 billion, and it shows no sign of stopping soon.
Image source: Getty Images.
Many investors like buybacks because they reduce the amount of a company's stock in circulation, giving each shareholder a greater claim on current and future earnings. But spending has an opportunity cost. And the cash used to buy back Sirius' stagnant stock could have been used to invest in long-term growth drivers for the company.
Where will Sirius XM be in the next five years?
While Sirius is not a horrible stock, its next five years look likely to be as lackluster as the previous five years. While the satellite radio business remains a stable cash cow, there isn't much opportunity for growth, especially with rising competition from alternatives like Apple Car Play.
To make matters worse , Sirius' management seems to have run out of ideas. Instead of investing in research or new business verticals, it is content to buy back its poorly performing stock, even though that money would likely enjoy a greater return in the S&P 500 . The benchmark index has risen 87% over the previous half-decade, while Sirius stock has fallen 60%. Investors can find a much better home for their capital.
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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Spotify Technology. The Motley Fool has a disclosure policy .
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