Subpar Car Sales, Capex And Cost Headwinds, Younger Consumer Churn Rates Compel Analyst To Downgrade Sirius XM

Rosenblatt analyst Barton Crockett downgraded Sirius XM Holdings Inc SIRI from Buy to Neutral and lowered the price target from $7.7 to $4.8.

With new and used car sales subpar, and a key driver of sub growth, SiriusXM is guiding for a modest decline in subscription for 2023, with revenues flat, EBITDA down 5%, and free cash flow down a third. 

A one-time nearly $100 million step-ups on royalties for pre-1972 songs, a 9% CPI inflator for streaming music fees, and a step-up in capex for new satellite launches through 2027 posed headwinds.

SiriusXM looked to consolidate into one satellite fleet from two, and satellite capex will drop substantially.

SiriusXM's paid sub-churn was at a record low of 1.5% per month in 4Q22. 

But CEO Jennifer Witz made comments consistent with long-standing bear stances that generationally, consumers will tend to turn away from satellite radio and other streaming services. 

While noting that free trial to paid sub-conversion rates declined due to volume trade-off, rising penetration of new car production boosts net sub-growth, implying favor with more lower-end models by younger and less affluent consumers.

Witz said younger consumers also churned at higher rates in favor of "personalization and more control over their listening experiences," likely to be addressed by installing new Internet-connected 360L radios. But these are now in only 7 million of the 150 million satellite radios on the road. 

As satellite radio personalization slowly progresses, highly personalizable car smartphones will have a rising generational embrace.

Over time, more and more sports (a big draw for SiriusXM) will also move to stream, implying more sports via streaming in the car without having to have a satellite radio subscription assuming consumers will listen to online feeds.

The above trends prompted the analyst to assume churn rates tick up over time, that subscription-growth, while returning over time to a positive number, will be much less than formerly thought, and that ARPU growth will also be a little less.

Price Action: SIRI shares traded lower by 0.45% at $4.43 on the last check Wednesday.