When it was reported in November that Warren Buffett's Berkshire Hathaway purchased shares of satellite radio company Sirius XM Holdings (SIRI), the media company's stock popped more than 10%. The sudden jump in share price is understandable, considering that up to that point, the stock had been struggling, down around 16% for the year.
Even with this pop, Sirius XM stock is down about 35% from its summer 2023 high, likely making some investors wonder if it is a buy now. Let's look at Sirius XM's prospects to understand if it may be worth buying shares today.
The undisputed leader in its space
When it comes to satellite radio, Sirius XM is essentially a monopoly. If you want satellite radio in your car, at home, or on your mobile device, there's really only one choice.
However, this does not mean that Sirius XM faces no competition. In fact, the company faces competition from every other kind of listening entertainment. Traditional radio, streaming music services, audiobooks, and podcasts are just some of the potential sources of competition.
This competitive environment was why Sirius and XM were able to merge back in 2008. In hindsight, the merger makes sense, considering the proliferation of content seen in the ensuing years.
Pivoting for the future
Sirius XM seems to have noticed the ever-increasing pressure of competition and is trying to meet the moment. In December, the company launched an updated app that has more features, meant to help it compete in today's streaming music environment.
Additionally, the company has a new in-car radio system that will help merge the traditional satellite radio features customers have grown accustomed to with the personalized and expanded content available on its app. This should provide a more seamless listening experience and eliminate the friction of needing to hop back and forth from the in-car radio to the app for specific content.
Growing its advertising business
While the majority of Sirius XM's revenue comes from subscriptions, it does generate some sales from advertising, mostly from its acquisition of Pandora in 2018. Interestingly, over the past five years, advertising revenue growth has outpaced subscription revenue growth rather significantly. This helped advertising revenue grow from 17% of total revenue in 2019 to 20% of total revenue in 2023.
With Sirius XM's substantial subscription base, it's unlikely that advertising will ever become a substantial part of the overall business, but management views advertising as one of its pillars for success, so the focus here should remain in the coming years.
Shareholder-friendly capital allocation
One can speculate that Sirius XM's capital allocation strategy is part of what drew Warren Buffett to the company. Sirius XM pays a dividend that yields 1.9%, above the market average.
It also has been repurchasing shares at an impressive rate. Over the past decade, Sirius XM has reduced its shares outstanding by 37%. This helped the company grow its earnings per share by 350% over the same time frame.
It's worth noting that the company will be slowing the pace of the share repurchases in the near term. Sirius XM is currently in agreement to merge with Liberty Media and then be spun back off as its own company again. SEC rules prohibit share repurchases during this time.
This restructuring will also change the company's debt profile, and management wants to get that back in order before returning to share repurchases again. The expectation is that this will all be worked out by mid-2025.
Is Sirius XM stock a buy now?
Fiscal 2023 was the first year Sirius XM saw its full-year revenue growth decline since its IPO. It also trades for price-to-sales and price-to-earnings multiples that are not far from the lowest they've been in a long time. There is some uncertainty in the near term due to the merger, but it appears the company is poised to remain competitive in the ever-evolving music entertainment landscape.
The reasonable valuation and future potential make Sirius XM stock a compelling risk/reward buy. That said, investors who are interested but uncertain about the near-term future should have time to wait and see without risking missing out on too much stock price appreciation.
