We’re only a few days into June, and already market-watchers have plenty to gab out.
Trade tensions have expanded from China to Mexico as President Trump has threatened to levy tariffs on our neighbors to the south, and regulators surprised the market a few days ago by opening antitrust investigations against some of the country’s biggest tech companies. Dovish words from the Fed on Tuesday sent the S&P 500 up more than 2%, and pushed a number of growth stocks up double digits.
Volatility usually presents opportunity for investors, and today’s market has plenty of uncertainty. Keep reading to see why our contributors think…
Don’t turn that dial
Sean Williams (Sirius XM Holdings): With June presenting somewhat of a lull in earnings reports, one U.S. stock worth keeping a close eye on this month is satellite radio provider Sirius XM Holdings.
Recently, Sirius XM pushed to a new 52-week low, with the company’s share price coming dangerously close to dipping below $5 per share, which would represent a more than two-year low. Dropping below $5 may also take it off the radars of institutional investors that traditionally invest only in stocks above $5 per share on major U.S. exchanges.
The problem for Sirius XM looks to be a combination of general market malaise sending its share price lower, as well as concerns about near-term costs as it integrates Pandora Media, which was officially acquired for $3.5 billion at the beginning of February. Although these very short-term costs do have the ability to cause Sirius XM’s bottom-line figures to disappoint, the long-term future for the company remains bright.
One of the primary factors that makes Sirius XM such an attractive stock in really any economic environment is its focus on subscription revenue. Even though its acquisition of Pandora adds to its advertising revenue — Pandora’s music platform is an ad-driven model — Sirius XM generated almost 84% of first-quarter sales from subscriptions. Since ads tend to be very reliant on the state of the economy (i.e., advertisers will rein in spending when growth slows) but subscription revenue is far less elastic to changes in the economy, this makes for steady and predictable cash flow year in and year out.
Sirius XM also has relatively predictable costs. With the exception of talent acquisition costs, which can vary wildly from one year to the next, Sirius benefits from the fact that its satellite network has more or less fixed transmission and operating costs. In other words, no matter how many subscribers the company nets, it’s not going to cost Sirius XM any extra to deliver that content over its network. That’s a recipe for long-term margin expansion as its subscriber count rises.
Given its reasonably strong pricing power, steady churn rate of only 1.8%, and operating cash flow that’s totaled nearly $1.9 billion over the trailing 12 months, I wouldn’t suggest turning the dial, and would consider nibbling on this beaten-down stock if its share price were to continue declining.
Time for a breakup? Could be a great time to buy
Jason Hall (Alphabet): As of this writing, shares of the company behind Google, YouTube, Waze, and a litany of other apps and websites used by billions of people every day have lost 10% of their value over the past year, and are down nearly 20% from the all-time high.
While there are several reasons behind the sell-off, one of the most prominent is concerns that…
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