In today’s market, reverse stock splits are rare. Investors often have a negative view of them, and companies typically only consider this when they believe it’s necessary. However, in some cases, it may be a good idea.
Sirius XM (NASDAQ: SIRI) has been fighting to remain relevant in a fast-evolving media environment. It just announced a 1-for-10 reverse split, which is expected this quarter. It will coincide with Sirius XM’s merger with Liberty Sirius XM Group (LSXMA, LSXMB, LSXMK), its tracking stock, which could reduce market confusion and bring in more institutional investors. Sirius XM stock has rallied over the past month, climbing 36%, but it's still trading 34% lower year to date.
What Is A Reverse Stock Split?
In a reverse stock split, the company decreases the number of existing shares while raising the per-share price. Also known as a stock consolidation, it doesn’t impact the company’s total value. It may be a sign of a company in trouble, as it raises the value of previously low-priced stock. This is commonly done so the company stays relevant.
If a share price has dropped to a very low level, the business may be unable to meet listing requirements. In the case of SIRI, Nasdaq may delist a stock that trades under $1 per share. If this happens, shares will be more difficult to buy and sell. A reverse stock split can also attract big investors, satisfy regulators, and boost the price of a spinoff.
Consider This
Currently trading around $3.24, once the reverse split goes into effect, SIRI’s stock will be $32.40. An investor who had 100 shares would now own 10. What does the future hold for Sirius XM? The satellite radio provider may be poised for continued growth in the latter half of the year due to:
- A reasonable multiple of about 11 times trailing earnings and expected free cash flow.
- Consistent dividend increases since 2016.
- Increased commuting and summer travel, leading to a boost in listenership and subscriptions.
- The ability to increase rates, following the lead of Spotify’s recent price hike.
- Unique content and monopoly status in satellite radio.
There’s another possibility here. There is currently high "short interest" in SIRI stock, meaning many investors are betting against it. This could lead to a "short squeeze" if the stock price rises, forcing these investors to buy shares and driving the price even higher.
The company's ability to adapt to changing market conditions and leverage its unique position will be crucial to maintaining this upward momentum.
Both Julie Stoller and Stocks.News have positions in this company.
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Contributing Writer
As a professional writer since 2012, Julie Stoller has covered many industries, from healthcare and technology to consumer products and industrials. She has written about IPOs, spinoffs, ETFs, stock splits, commodities, legislative actions impacting investors, and macroeconomic issues. While keeping up with the latest meme stocks and trends, Julie's special interests are discovering ...