The streaming industry is packed to the gills with different services. While Netflix and Hulu dominate television and movie streaming, platforms such as Spotify Technologies, Apple Music, and Alphabet's YouTube are arguably just as popular given the rise of podcasts.
When it comes to streaming content on the radio, one player basically owns the space: Sirius XM (SIRI). While radio may not come to mind when you think about monster growth potential, there is a reason why Sirius XM has earned a position in Warren Buffett's esteemed portfolio.
Let's dig into Sirius XM's business and get an understanding of how the radio giant makes its money. More importantly, after assessing the business model, investors should take a hard look at the company's financial and operating profiles to determine whether following Buffett's lead makes sense.
How does Sirius XM make money?
Most radio stations survive on revenue from advertisers. As with commercials on television, brands study analytics around which stations in different markets are the most popular. By getting a better understanding of this demographic data, advertisers can then target specific campaigns to groups of listeners throughout the day.
Sirius XM is a little different from traditional terrestrial radio stations, though. The company essentially owns the satellite-radio industry in North America. Given its dominant reach, you'd be correct in assuming that advertisers are eager to get in front of Sirius's base. However, would you be surprised to learn that only about 20% of the company's revenue comes from advertising?
Over three-quarters of Sirius XM's revenue actually comes from subscriptions. That's right! Unlike terrestrial radio stations, listeners do not have the ability to simply tune in to Sirius. Rather, the company requires that you buy a subscription in order to access its exclusive content library, which is filled with music, talk shows, sports stations, and more.
Image source: Getty Images.
Buffett likes predictable businesses -- should you?
Buffett's investment style is actually quite simple. The billionaire investor typically seeks companies that generate steady growth and sustained profits, and that build best-in-breed brands. According to regulatory filings, Buffett added over 30 million shares of Sirius XM stock to his position during the quarter ending December 2023.
Given Sirius XM's whopping 34 million subscribers, the company's business should be fairly easy to predict. A high stream of recurring revenue and a relatively low expense profile make for a pretty compelling investment.
However, investors should take a look underneath the hood before following Buffett and pouring into Sirius XM stock.
Should you invest in Sirius XM stock?
The table below illustrates Sirius XM's subscriber count over the last several years:
| Category (in thousands) | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 |
|---|---|---|---|---|---|---|
| Subscribers | 34,039 | 34,909 | 34,714 | 34,033 | 34,305 | 33,875 |
Data source: Company filings.
It's easy to see the glaring issue in the table above: Sirius XM has a churn problem. Subscriber growth has been inconsistent over the last several years, and is currently in decline. The company has also struggled to recapture pre-pandemic levels.
In a way, this makes some sense. Despite Sirius XM's leading position in satellite radio, one detriment to its business is that there are alternative forms of streaming competition. Additionally, as remote work conditions become increasingly normalized, many people are not spending as much time in their cars anymore, and so they've forgone their subscription to Sirius.
SIRI PS Ratio data by YCharts.
The chart above benchmarks Sirius XM against a cohort of other leading media businesses on a price-to-sales (P/S) basis. With the exception of Netflix, it seems to me thae market isn't placing much of a premium on entertainment businesses.
My suspicion is that as demand for high-quality content continues to rise, it can be challenging to determine which companies and which media formats will see the most success. For example, while Netflix faces fierce competition in visual streaming, the company has emerged as a leader due to its vast content library, which includes blockbuster movies, miniseries across all genres, documentaries, sports, and more.
So even though Sirius dominates satellite radio, that does not necessarily mean the company is the best service when it comes to audio entertainment. While I understand how some investors may like Sirius as an investment due to its recurring revenue stream and steady profits, I am not sold that the company has a viable strategy to solve its lingering churn issue. I'll continue to happily pay for my Sirius subscription, but I'll look elsewhere for portfolio growth.
