Sirius XM Stock: Next Stop, $8?

At least one bull is growing more bullish on Sirius XM Holdings (NASDAQ: SIRI). Bank of America/Merrill Lynch analyst Jessica Reif just boosted her share price target on the satellite radio giant from $7 to $8. She’s encouraged by the healthy pace of new car sales in the country — the lifeblood of Sirius, as new vehicles put it in front of potential new subscribers.

Reif also isn’t buying the bears’ argument that Sirius XM’s popularity will suffer as more vehicles roll off the assembly line equipped with CarPlay or other connected-car platforms. It may seem like drivers with Bluetooth-tethered smartphones might be tempted to dump their satellite radio subscriptions in favor of streaming free or nearly free audio through their dashboards, but she points out that the numbers don’t support that naysayer thesis. The conversion rate of free-trial subscribers to new accounts continues to hover around 40%, and the monthly churn rate has remained historically reasonable, at or just below 2%. In Sirius XM’s latest quarter, the conversion rate dipped to 39%, but churn held steady at 1.8%.

Image source: Sirius XM Holdings.

Rolling with the changes

Reif boosting her target on Sirius XM isn’t a surprise. The stock price cracked through the $7 ceiling in mid-May, and it’s trading now at levels last seen in late 2005. On Thursday, the stock hit a new 12-year high for the seventh consecutive trading day. Momentum is rolling with the bulls.

A bullish call and a $7 price target don’t go together when applied to a stock that closed Wednesday at $7.31. Bumping her goal higher or downgrading the satellite radio monopoly to neutral or worse were the options at this point, and the bulls are fortunate she went with the former. She probably won’t be the last Wall Street pro to go this route.

The real surprise here is that no major analyst has a price target higher than $8. Wall Street’s range is as high as $8 and as low as $5 with an average that’s smack dab in the middle at $6.49. Shares need to gain less than 10% from current levels to hit $8, and that distance is likely to shrink. Reif’s peers will need to do some soul searching and financial model updating, then pick a direction. Are they bullish enough to go with higher price targets? Or, if they feel that the valuation concerns are too great to continue recommending the stock at these levels, some downgrades may be in order.

Growth has slowed at Sirius XM, but it continues to gain ground and market share with every passing quarter. Today, it’s serving up audio entertainment to a record 33.1 million total subscribers. Now that a federal judge has cleared the path for a megamerger elsewhere in the media firmament, it’s also possible that Sirius XM will begin to be discussed as potential buyout candidate, given its niche dominance. Analysts with stale recommendations and out-of-date price targets have some work to do. From where I sit, the logical path at this point is for those ratings to remain bullish, and for price goals to follow Reif’s target higher.

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Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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