Sirius XM

With 1% year-over-year revenue growth, SiriusXM increased its second-quarter EBITDA margin by 1 percentage point and expanded free cash flow substantially. The firm modestly raised its 2026 outlook.

Why it matters: We don't believe Sirius has a realistic opportunity to widen its subscriber base in the era of music streaming platforms, so we see its value coming from robust free cash flow generation and growth in advertising revenue that can offset a stagnant to declining core subscription business. The firm added 21,000 paying SiriusXM subscribers, a huge improvement from typical contraction, but we believe the figure is misleading. Companion plans added on to existing full-priced subscriptions at no extra price drove a major portion of the additions. The fact that companion subscriptions are free does not mean they are without significant value, as they help retain the most valuable subscribers and bring opportunity for additional advertising revenue. Average revenue per SiriusXM subscriber rose 1% year over year, and churn of 1.4% was the lowest in company history.

The bottom line: We will raise our fair value estimate to $32 from $31, mostly to reflect the time value of money. Despite lacking a moat, in our view, we believe Sirius retains value given its ability to generate cash in a no-growth environment. Free cash flow increased to $593 million, from $402 million a year ago, driven mostly by the timing of payments and cash taxes. Capex only decreased $15 million from the year-ago period. We expect it to decline much more sharply over the next two years as the firm nears the end of its satellite investment cycle, with only one satellite remaining to launch.

Between the lines: The one area of growth is off-platform advertising, which was up 20% year over year, including podcast advertising up 30%. Sirius's continued integration with Amazon.com's ad platform should bring further tailwinds.

Our fair value estimate is $32 per share, implying an enterprise value/adjusted EBITDA multiple of 8.0 and a price/earnings multiple of 10.0 based on our 2026 estimates. We expect SiriusXM to have difficulty expanding its top line, but we think it can maintain margins and continue generating a good amount of free cash flow throughout our five-year forecast.

We project sales for SiriusXM, which accounts for about 75% of SiriusXM’s total revenue, to decline each year slightly over our forecast period. We project the subscriber base to contract further, and we expect revenue per subscriber to decline as well. We don’t think the value of the SiriusXM offering is worth the higher price point to enough consumers compared with the lower monthly price of streaming music services. We think the firm can slow the pace of customer defections by promoting its app-only service, but this plan will cannibalize some subscribers who previously subscribed to the higher-priced standard satellite plan, resulting in lower revenue per subscriber. In total, we project SiriusXM revenue to decline 1% annually from 2026 to 2030, with modest declines in both the subscriber base and average revenue per subscriber.

We project about 3% average annual revenue growth for the Pandora and off-platform segment, which makes up the remainder of SiriusXM’s revenue. We think Pandora will have difficulty adding new subscribers, as it is at a disadvantage relative to industry behemoths like Spotify and Apple Music. However, we expect prices to rise throughout the subscription music streaming industry, and we expect Pandora to follow suit. More importantly, we believe SiriusXM has multiple catalysts to increase advertising revenue, most of which are reported in this segment. We expect off-platform revenue to grow significantly as Sirius XM monetizes the podcasts to which it holds rights—like Call Her Daddy and SmartLess, among many others—across other audio platforms. Additionally, we think advances in the firm’s advertising business and ad targeting—including through the new 360L satellite radios—will improve targeting and, therefore, ad pricing. The impact of the 360L radios will flow to the SiriusXM segment, but most of SiriusXM’s advertising revenue comes from its Pandora and off-platform segments.

We project margins to remain roughly flat throughout our forecast. SiriusXM is undertaking a cost-reduction plan, but we don’t expect this to translate into margin expansion, as we think the firm will experience operating deleverage as its top line shrinks, and we expect the firm to continue allocating cost savings back into the business. We project gross margin to remain at roughly 52% throughout our forecast, while we project operating margin to mostly hover between 22% and 23%.

Despite a modestly shrinking business, SiriusXM should continue to generate a decent amount of free cash flow, and we expect a step-up in free cash flow as the firm moves past its current investment cycle, which involves deploying four new satellites between 2024 and 2027. We project free cash flow of about $1.4 billion in 2026 and $1.5 billion in 2027, after which we expect the accelerated capital spending to be completed. We then expect free cash flow to mostly flatline due to the largely stagnant revenue and operating profit that we project. This implies an average free cash flow margin in the mid- to high teens throughout our forecast.

We assign a no-moat rating to Sirius XM. In our view, some of the moat sources that had been present for Sirius, like cost advantage and efficient scale, are no longer pertinent, considering the technological evolution that has made streaming music services ubiquitous in many areas. Sirius XM has different competitors than it once did, and we believe it has a more difficult time competing against this new wave.

At one time, SiriusXM—the segment that makes up most of Sirius XM’s business—had a unique business that enabled nationwide US audio transmission primarily to vehicles from satellites. It offered a subscription, commercial-free service with some high-profile exclusive content that was not subject to Federal Communications Commission restrictions at a time when alternative in-vehicle listening was otherwise limited to terrestrial radio stations or playing one’s owned music via cassettes, CDs, or MP3s. Vehicles needed customized radios to receive the satellite service, and Sirius’ agreements with automakers not only led to inclusion of those radios in vehicles but also a free trial period of service to vehicle buyers in an era when few people had experienced the benefits of a subscription audio service. A rival looking to offer a competing service not constrained by a relatively small geographic footprint, as occurs for over-the-air radio stations, would have had to set up a similar network of satellites and agreements with auto manufacturers.

SiriusXM still offers the same service, albeit in a slightly improved manner, in our view. However, it now competes with subscription music streaming platforms. Internet connectivity in vehicles, combined with vehicle infotainment systems that support apps like Apple CarPlay and Android Auto, allows users to easily access these streaming services in vehicles. In response, SiriusXM has moved toward an offering that looks more similar to the streaming music services rather than more distinct. SiriusXM now offers a streaming-only subscription option as well as a streaming app that works cohesively with its new satellite radios, so that vehicle subscribers can easily access their subscriptions whether they are in a vehicle or not. It also offers a wider variety of subscription levels and is experimenting with ad-supported plans.

A SiriusXM subscription is not completely interchangeable with the major music streaming services, as it has different features and capabilities that can be pros or cons based on an individual’s preferences. However, SiriusXM charges much more than double for the satellite vehicle service than what consumers pay for a typical music streaming subscription, and it has less unique content than it traditionally had, especially now that the industry’s podcast business model has trended away from platform exclusivity. Whether exclusive or not, we also see no competitive advantage in the podcasting business. Even if Sirius had long-term ownership of podcasts created on its platform, podcast episodes don’t retain value over time. As such, only having licensing rights for current episodes generates material revenue. We expect the most popular creators to generally sign wherever they receive the highest compensation.

The top-tier SiriusXM service still offers users unique access to listen to major sporting events or talk show personalities, but we don’t see the unique aspects as compelling to a large enough market, nor do we think SiriusXM has an advantage in licensing the rights to this content. We don’t think the service provides a strong enough value proposition for most consumers, and we don’t expect it to attract new subscribers in large numbers.

Pandora is the Sirius XM business that most closely replicates streaming music platforms like Spotify, offering similar pricing, content, capabilities, and interactive features. While these platforms are eating into SiriusXM's potential subscriber base and making the service somewhat of a relic, in our view, Pandora is not large enough to compete effectively. Pandora’s subscriber base, which is exclusively in the US, has also been flat since the beginning of 2018, and we estimate it’s only about 6% of the size of Spotify’s North American subscriber base. We believe Pandora can offer a very similar user experience as Spotify and other streaming platforms, but its lack of scale and its inability to differentiate on service or price give it little opportunity to take share from industry leaders, in our view. The use of music on interactive streaming platforms like Pandora is not compulsory, meaning record labels have outsize influence over how a service like Pandora prices and packages its offerings. It appears management views Pandora's disadvantage similarly, as the firm has put all its innovation and focus into promoting and improving the SiriusXM service.

SiriusXM’s new offerings and capabilities—including an app-only subscription, better compatibility with vehicles, and more ad-supported plans—should make its service more competitive with the subscription plans of streaming music providers.

Even with a stagnating subscriber base, Sirius XM has ample room for advertising revenue growth, through better targeting and offering its podcasts on third-party platforms.

Between cost optimization and the end of heightened capital investment, free cash flow can grow substantially even without revenue growth.

SiriusXM’s standard subscription price is far higher than that of the streaming music services that are now its primary competitors, which will lead to a continuing decline of traditional subscribers.

SiriusXM’s streaming app-only plan can mitigate the traditional subscriber decline, but the trade-off will be much lower pricing, and a lack of customization may still make music streaming services more attractive.

SiriusXM is trending toward less proprietary content, further diminishing its value proposition. Podcasts are no longer exclusive, and Howard Stern may be nearing retirement.