The greatest investor of our time — besides you, of course — owns a public portfolio of more than three dozen stocks. One name that I think can deliver big gains from today’s starting line is Sirius XM Holdings(NASDAQ: SIRI). Warren Buffett’s Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) now owns more than a third of the country’s lone satellite radio provider.
The shares have been a drag on Berkshire Hathaway’s scorecard lately. Sirius XM stock has plummeted 63% since the start of last year. Making matters worse, Buffett has been adding on the way down. Going against the popular Peter Lynch adage that one shouldn’t cut their flowers to water their weeds — something Buffett himself quoted once in an annual shareholder letter — Berkshire Hathaway has boosted its position three times in the last six months.
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There are some very good reasons for Sirius XM falling out of favor, but have the downticks and pessimism outpaced the fundamentals on the way down? There are also some very compelling reasons why Berkshire Hathaway is buying when others are selling. Let’s dive into why Sirius XM can go parabolic for the balance of 2025 and beyond.
Satellite radio was a lifeline for both car manufacturers and drivers when it launched more than two decades ago. Car owners could be treated to coast-to-coast coverage of unique content and commercial-free music. Showroom operators had a juicy premium offering they could add to vehicle sales. Sirius and XM were fierce but unprofitable competitors, carving out exclusivity deals with various automakers.
A couple of factors derailed the revolution, despite years of stellar growth. Unlike terrestrial radio, the music played on satellite radio results in royalties that must be paid to the artists and record labels. A spike in those rates made it unlikely that either player would achieve profitability without massive scalability.
Another detour came in the form of streaming apps on phones. Their popularity had potential car buyers clamoring for connected car technology to tether their devices to their vehicle stereo systems via wired or Bluetooth solutions. The car manufacturers had no choice but to play along.
It’s against this backdrop that regulators allowed one of the few monopolies in modern times to happen when Sirius and XM announced plans to merge ahead of the global financial crisis. It took a long time and some costly financial lifelines to bring the two companies together, but the result would eventually become a profitable yet slow-growing company.
Image source: Getty Images.
Satellite radio subscriptions peaked almost six years ago, but the downslope hasn’t been steep. It’s more a case of stagnancy than an avalanche of defections. Revenue continued to rise gradually every year, peaking in 2022, as subscribers were willing to pay more for the platform. The acquisition of streaming app Pandora in 2019 also helped pad results. Revenue has now declined in each of the last two years, but the top line has declined by only 3% in that time. If Sirius XM is fading out, it’s a very slow fade.
Sirius XM may not be thriving, but it’s certainly surviving. It continues to generate annual free cash flow north of $1 billion. It’s a money machine that has been aggressively buying back its stock, cutting its share count in half over the past dozen years. Per-share earnings have more than doubled since its subscriber count peaked more than five years ago.
Reality doesn’t match the stock chart, but this isn’t a perfect melody. Sirius XM still has a loyal base of listeners — with monthly churn holding steady at around 1.5% — but the funnel of young drivers that was initially the platform’s lifeblood is thinning. In most cars nowadays, it’s too easy to stream audio apps that are cheaper, free, or things folks subscribe to anyway. However, this still doesn’t have to end badly for Sirius XM.
Several factors can turn revenue around, which Sirius XM expects to dip slightly in 2025 for the third consecutive year. The average age of passenger cars on the road is clocking in at a record 14 years. An inevitable recovery in vehicle sales could jump-start growth. Cheaper gas, a jump in stateside road trips amid the current geopolitical tumult, and companies calling employees back to in-office work could keep folks driving more. This is not just the wear and tear that will lead to new car sales but also the incentive to justify paying for a satellite radio subscription.
Sirius XM is trading for less than 7 times forward earnings and a lot less than its trailing revenue. It’s currently yielding 5.4%, and the payout has increased every year since the media giant began quarterly distributions eight years ago. There’s more than $10 billion in debt, but the valuation multiples are still reasonable if you use enterprise value instead of market cap as the numerator.
I could have led with the valuation argument, but that wouldn’t make good radio. The point here is that Sirius XM isn’t broken. It’s not in the waiting room of obsolescence. It’s a company taking a breather as its stock price deflated. It’s time to breathe out again.
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Rick Munarriz has positions in Sirius XM. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
1 Warren Buffett Stock That Could Go Parabolic in 2025 and Beyond was originally published by The Motley Fool
