Investing.com -- Bank of America analysts resumed coverage of Sirius XM (NASDAQ:SIRI) with an Underperform rating and a $23 price target, citing multiple headwinds that could constrain the satellite radio provider's growth and profitability in the near term.
According to BofA, Sirius XM now faces a "challenging road ahead" and has become a "show-me story" for investors.
BofA believes that subscriber growth will remain muted due to several factors.
They state that the company is struggling to attract younger listeners, who are increasingly favoring streaming platforms. Additionally, BofA argues that the widespread adoption of Apple (NASDAQ:AAPL) CarPlay and Android Auto has diminished Sirius XM's in-vehicle advantage, contributing to lower new car conversion rates.
BofA estimates that Sirius XM's current conversion rate is around 30%, compared to approximately 40% in earlier years. The analysts further note that the company's ability to maintain its subscriber base depends heavily on historically low churn rates.
While Sirius XM has managed to support its earnings through cost control, BofA warns that this strategy is unsustainable as a driver for long-term equity upside.
"Multiple expansion is rarely driven by a reduced cost base," the analysts wrote. They highlight risks that cost pressures could resurface, particularly from rising expenses related to podcasting talent and content programming.
BofA also identified Pandora (OTC:PANDY), the streaming service owned by Sirius XM, as a weak spot, forecasting continued declines in active users and listening hours.
Despite stabilization in the ad market, BofA projects a 3% drop in Pandora's listening hours, limiting its potential for ad revenue growth.
With Sirius XM's capital expenditures rising, including investments of $450-$500 million in technology and broadcast infrastructure, BofA expects higher leverage to restrict share buybacks until 2026 or 2027.
The analysts conclude, "Our $23 PO is derived using a DCF framework, which implies a ~6.5x EV/' 25E EBITDA multiple."