Barclays Shows Concern Related To Sirius XM's Next Few Years

While naming Sirius XM Holdings Inc. SIRI a favorite among internet and media stocks, Barclays’ Kannan Venkateshwar said the outperformance of stock over the past six months had left the risk-reward more balanced. The analyst downgraded the rating from Overweight to Equal-Weight, while maintaining the price target at $4.90.

Venkateshwar mentioned Sirius had been a favorite name due to the company’s “clean execution story, substantial normalized capital returns and visibility of growth rates.” However, shares had outperformed the SPX by about 18 percent in last six months.

Next Couple Of Years To Be More Challenging

“While we continue to like fundamental story, the next couple of years will likely be a bit different,” Venkateshwar commented. He noted the following reasons:

• Peaking Auto Sales and Penetration: Auto sales have grown at a CAGR of 6.5 percent over the past five years, and penetration has increased to 75 percent. Auto sales and penetration rates now have limited upside remaining.
• Slowing Margin Expansion: Although the company could continue to generate margin expansion, the pace of expansion would likely decelerate due to “a potentially slower subscriber growth trajectory, some step up in royalty costs post 2018 and lower pace of SAC [sales acquisition cost] declines,” the analyst wrote.
• M&A: As the float shrinks and Liberty's stake continues to grow, “the possibility of M&A is tough to handicap,” Venkateshwar commented.

Related Link: The Intel-Mobileye Deal Caused This Analyst To Downgrade Sirius XM