SiriusXM stock drops after surge. What is to blame.

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SiriusXM’s huge surge was partly reversed after two Wall Street analysts downgraded and reassessed the satellite radio company’s lofty valuation.

On Friday morning, SiriusXM stock (ticker SIRI) was down 7.8% at $7.20 after rising 42%, or $2.32, on Thursday to $7.81. The stock lift was a mix of short hedging, the unwinding of an arbitrage trade involving Liberty SiriusXM (LSXMA) and a possible buy ahead of a rebalancing of the Nasdaq 100. The stock has again nearly doubled in the past month.

Pivotal Research Group analyst Jeff Wlodarczak downgraded SiriusXM to Sell from Hold.

“SIRI shares now trade at 15X EBITDA (30X free cash flow) for an entity from which we expect EBITDA to decline (-9%) in 23 and EBITDA CAGR in the low single digits thereafter,” Wlodarczak wrote in a client note. He raised his price target to $4.50 from $4. CAGR refers to the compound annual growth rate.

Barrons wrote about the surge in SiriusXM stock on Wednesday and Thursday.

Seaport Research Partners analyst David Joyce lowered his rating on the stock to Sell from Neutral, citing a valuation. He wrote that the trends “probably improve from here, but not to THAT degree.” It has a price target of $4.50.

Here are the numbers on SiriusXM, showing it’s more popular than comparable companies.

After Thursday’s rise, which capped a rally that began in June, SiriusXM was valued at around $30 billion with about $9 billion in debt. Its earnings before interest, taxes, depreciation and amortization, or Ebitda, is expected to be around $2.75 billion this year, based on management’s forecast, little changed from 2022. That means the company’s $40 billion enterprise value (market cap plus debt) is 15 times Ebitda.

However,

Comcast

(CMCSA) and

Charter Communications

(CHTR), two of the leading cable and broadband providers, are valued at around seven times the Ebitda forecast for 2023.

Management says

SiriusXM
It is

free cash flow is expected to fall to $1.1 billion in 2023 from approximately $1.6 billion in 2022 due to higher capital spending. The company has approximately 34 million subscribers to its satellite radio business and also owns Pandora, the music streaming business.

The surge in SiriusXM stock was fueled by low stock float and strong short interest. Liberty Media owns about 83% of the company and effectively put that stake in a follow-on stock, Liberty SiriusXM. Trackers give holders economics of the underlying assets but not direct ownership.

Recent short interest of about 220 million shares was about a third of the public float, one of the highest ratios in the Russell 1000 Index. Reflecting the high short interest, the cost of borrowing the shares has been very high.

Many hedge funds engaged in a trade in which they were long Liberty SiriusXM and short SiriusXM, betting that the spread, which stood at around 35% in June, in line with its historical average, would tighten.

The hoped-for catalyst is Liberty’s plan to split Liberty SiriusXM tracking stock into two trackers, one tied to Liberty Media’s SiriusXM holding and the other to a 30% stake in Live Nation (LYV) which has been housed inside Liberty SiriusXM. The split is expected to take place in early August.

Some investors thought the simplification would narrow the gap, but instead it exploded, hitting around 60% on Thursday as SiriusXM stock soared.

Benchmark analyst Matthew Harrigan called the Liberty SiriusXM/SiriusXM trading pairs “forever”. Investors have been playing this trade, usually with little success, for years.

Reflecting the apparent unfolding of the trade, with the sale of follow-on shares and the purchase of SiriusXM, LibertySirius was little changed on Thursday at $34.57, even as its biggest asset, SiriusXM, rose 42%. Liberty SiriusXM was down 1.5% on Friday at $34.07.

The wild trade in SiriusXM stocks shows the volatility that can result from big short positions in thin-float stocks.

Write to Andrew Bary at andrew.bary@barrons.com