What can be anticipated for Sirius XM's share value over the next five years?
One of the notable events in the recent past is Warren Buffett's consistent selling of major assets. His company, Berkshire Hathaway, has sold off a substantial amount of stocks this year, accumulating an impressive $325 billion in cash reserves. Despite this, Buffett seems to have a soft spot for one company: Sirius XM (SIRI, 12.15%). Berkshire Hathaway recently invested an additional $60 million in the company, granting them ownership of over 33% of Sirius XM.
Sirius XM, a company that provides both satellite radio service and music streaming through Pandora, has seen its stock prices plummet by over 50% this year. Given this situation, is it a good idea to invest in Sirius XM, or will it end up as one of Buffett's rare mistakes?
Why Warren Buffett Likes Sirius
Buffett is a staunch advocate for investing in businesses with competitive advantages, also known as a "moat." Sirius XM's monopoly in the satellite radio market is a powerful advantage. Entrants into the market would need to invest heavily in infrastructure and marketing to establish themselves, making competition difficult.
Sirius XM's subscriber base is impressive, with 33 million customers in total, including many subscribers who tune in via their car radios. The company reported a net loss of $3 billion for the last quarter due to accounting adjustments, but this loss is not a reflection of the company's normal performance, as its quarterly net income averaged $300 million for the three preceding years.
Management projects $1 billion in free cash flow (FCF) for 2024. This projection includes one-time costs from recent deals and significant capital expenditures, especially in satellite infrastructure. Once these costs normalize, Sirius XM can target a long-term FCF of $1.8 billion.
One of the most compelling aspects of Sirius XM is its exceptionally low churn rate. In the latest quarter, churn was just 1.6%, an indicator of strong customer satisfaction and a promising sign for the company's future stability.
Potential Concerns
There are several factors to consider that might be cause for concern. Sirius XM carries a heavy debt burden and relies heavily on its relationships with car manufacturers. However, the most pressing issue is the company's slow growth. While there has been an increase in one key subscriber demographic, long-term trends for the company are not encouraging.
To counteract this, Sirius XM acquired Pandora in 2019. However, Pandora has not been able to keep up with competing streaming services, such as industry leader Spotify with its 620 million monthly active users (MUAs). In contrast, Pandora has only 46 million MAUs and is experiencing a decline in popularity. This does not bode well for the long-term future of the company.
Sirius XM at a Discount
Despite these challenges, there is the potential for growth in Sirius XM's FCF in the near future. The stock is currently trading at a significant discount, making it an attractive investment opportunity for those with a longer-term outlook.
In conclusion, Warren Buffett's interest in Sirius XM, despite the company's challenges, may indicate a good investment opportunity. However, investors should carefully consider the long-term prospects of both Sirius XM and Pandora before making a decision.
After analysing Sirius XM's competitive advantages and financial performance, Buffett decided to invest an additional $60 million in the company, increasing Berkshire Hathaway's stake to over 33%. This investment strategy indicates that Buffett believes in the company's potential for growth, despite the current challenges.
Investors who share Buffett's long-term outlook might find Sirius XM's current stock price an attractive investment opportunity, given the company's strong subscriber base, low churn rate, and potential for future free cash flow growth. However, considering the company's heavy debt burden, reliance on car manufacturers, and the slow growth of its main streaming service, Pandora, it is crucial to conduct thorough research and risk assessment before making an investment decision.
