Bank of America Analysts Rate Sirius XM as Underperform

Investing.com — Bank of America analysts resumed coverage of Sirius XM (NASDAQ:SIRI) with an Underperform rating and a $23 price target, citing multiple headwinds that could constrain the satellite radio provider's growth and profitability in the near term.

Challenging Road Ahead

According to BofA, Sirius XM now faces a "challenging road ahead" and has become a "show-me story" for investors.

Subscriber Growth Concerns

BofA believes that subscriber growth will remain muted due to several factors:
– Struggles to attract younger listeners who favor streaming platforms.
– Adoption of Apple CarPlay and Android Auto has diminished Sirius XM's in-vehicle advantage, contributing to lower new car conversion rates.

BofA estimates that Sirius XM's current conversion rate is around 30%, down from approximately 40% in prior years. The company's ability to maintain its subscriber base heavily relies on historically low churn rates.

Unsustainable Earnings Support

While Sirius XM has managed to support its earnings through cost control, BofA warns that this strategy is unsustainable for long-term equity upside. They stated, "Multiple expansion is rarely driven by a reduced cost base." Analysts highlight risks of cost pressures resurfacing, particularly from rising expenses related to podcasting talent and content programming.

Challenges with Pandora

BofA identified Pandora (OTC:PANDY), the streaming service owned by Sirius XM, as a weak spot, forecasting continued declines in active users and listening hours. Despite stabilization in the advertising market, BofA projects a 3% drop in Pandora's listening hours, limiting its potential for ad revenue growth.

Capital Expenditures and Future Outlook

With Sirius XM's capital expenditures rising, including investments of $450-$500 million in technology and broadcast infrastructure, BofA expects higher leverage to restrict share buybacks until 2026 or 2027.

The analysts concluded, "Our $23 PO is derived using a DCF framework, which implies a ~6.5x EV/'25E EBITDA multiple."