Sirius XM Stock Swings Wildly on Short Squeeze; No Change to Underlying Business or Valuation

Key Morningstar Metrics for Sirius XM

• Fair Value Estimate: $7.50
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

Sirius XM Stock Update

Sirius XM SIRI shares jumped by over 42% on July 20 before falling back sharply on Friday. The share price spike Thursday was not driven by any company-specific news but rather by a short squeeze in the afternoon. (In a short sale, a trader bets that the stock will fall by selling borrowed shares. Closing out the trade requires buying back shares of the stock.)

Roughly 34% of the limited float in Sirius XM shares were held short at the start of the day as a number of short sellers were reportedly attempting a complicated trade to capitalize on the reformulation of the Liberty Media tracking stocks. As there is no apparent change to the underlying businesses at Sirius XM, we maintain our fair value estimate of $7.50. While Sirius XM is now trading near our fair value, we think shares may fall from these levels as the short-squeeze buyers cash out.

The reformulation of Liberty Media tracking stocks is part of the process for spinning out the firm’s Atlanta Braves holding into a separate stock. Before the spinout of the Braves on July 19, Liberty had three groups of tracking stocks. First, LSXMA/LSXMB/LSXMK for its Sirius XM stake of roughly 82% of the shares; its 31% stake in Live Nation; and 3% intergroup interest in the Braves. Second was FWONA/FWONK for Formula One and 11% intergroup interest in the Braves. Third was BATRA/BATRK for 85% of the Braves Group. After the spinout, Liberty has two tracking stocks for Sirius XM and Formula One less the Braves interest as holders received the new Braves shares. After trading closes on Aug. 3, the firm will have three trackers once again: one set for the Sirius XM stake; one set for Formula One; and a new one for the Live Nation stake trading as LLYVA/LLYVB/LLYVK.

One quirk of the Sirius XM tracking stock is that it has traditionally traded at a discount of around 30% to the net asset value of the underlying shares. The short trade in Sirius XM was based on the belief that the reformulation would help close that gap. However, the large number of shares held short along with a relatively small float provided fertile ground for a short squeeze, as seen on July 20.