One of the cheapest stocks I know got even cheaper last week. Sirius XM Holdings (SIRI 2.31%) stumbled after posting a big earnings miss, but I think the legal satellite radio monopoly can bounce back as positive catalysts breathe new life into the out-of-favor media giant.
You may argue that it's not fair to call Sirius XM an "ultimate growth stock" when there hasn't been a lot of growth to cheer about for some time. Sirius XM is squarely in the camp of value and income investors. However, it has a few tricks up its sleeve to make it shine even in light of last week's poorly received financial update.
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Listen more closely
Shares of Sirius XM tumbled 8% on Thursday after the company announcing its second-quarter results. More than 15 million shares were traded, the stock's heaviest volume since its reverse split in the late summer of last year. The slide pushes its attractive yield to 5.1% and its 2025 earnings multiple below 8. It would be an attractive situation if not for the fact that Sirius XM has all the makings of a value trap.
Investors have been burned in the past by viewing Sirius XM through the rosy glasses of a value or income stock investor. The shares have fallen 34% over the past year, plummeting 64% over the past five years. I know it might seem like heresy to tag a stock with revenue declining for the third year in a row as a growth stock, but humor me for a moment.
It's been a decade since the media stock posted double-digit organic revenue growth. After eight years of single-digit top-line growth, revenue is declining for the third year in a row. Making matters worse, the pace of the negative top-line growth is accelerating. Sirius XM has responded to the situation the way most value stocks generating gobs of free cash flow would: It has returned money to its investors through stock buybacks and a hefty dividend that has gone up for seven consecutive years.
Sirius XM has been aggressively repurchasing its shares over the past 12 years. The good news is that it has cut its outstanding share count nearly in half over that time, something that naturally improves profitability per share. The bad news is that it has been buying stock all the way down in recent years, a result that gives buybacks a bad name.
This year's problem is that its bottom line is falling faster than its ability to repurchase its stock. Sirius XM has kicked off 2025 with two big earnings misses. The $205 million in net income it delivered for the three months ending in June is well below the $354 million it generated in last year's second quarter. On a per-share basis, Sirius XM's quarterly profit of $0.57 is well below the $0.74 it posted a year ago and the $0.77 that analysts were forecasting.
It wasn't all bad. The $402 million in free cash flow it produced during the quarter is a 27% year-over-year improvement. Sirius XM is also sticking to its earlier full-year guidance across its projected metrics. Sirius XM's audience is thinning, but loyalty remains strong with its monthly churn rate near a historical low of 1.5%. It may have lost 68,000 more self-pay subscribers than it gained during the quarter, but that's a dramatic sequential and year-over-year improvement.
Glimmers of growth
It's not just Sirius XM snapping up its shares. Warren Buffett's Berkshire Hathaway has been aggressively buying the stock following its reverse split. Berkshire Hathaway now owns more than a third of the company. Berkshire Hathaway isn't a tastemaker for growth investors, but it's a good sign when the greatest investor of our time thinks a stock is bottoming out. Now let's talk about the turnaround.
Sirius XM is struggling on a few fronts. Ad revenue per user has fallen considerably over the past year as marketers pare back on audio ads in an iffy economy. Subscriber acquisition costs have also moved higher, ironic given its own decline in ad revenue.
It's against this backdrop that Howard Stern -- the radio host who put Sirius on the map 20 years ago, which eventually led to XM and Sirius joining forces -- will likely hang up his headphones by the end of this year. Thankfully, Sirius XM has been working had to sign podcasters, radio hosts, and other notables to its platform. One promising nugget in the otherwise bleak second quarter is that podcast revenue rose 50% over the past year. It's still not moving the needle, but turning to fresh voices with young audiences like Alex Cooper and Trevor Noah is a big move that should pay off sooner than worrywarts think.
There are plenty of tailwinds hiding in plain sight despite the sinking stock chart. Companies calling employees back to in-office work should lead to more time spent in traffic with a need for audio entertainment. Drivers have more options than Sirius XM and terrestrial radio in this era of the connected car, but now the satellite radio provider has the ear candy that younger adult listeners crave. More wear and tear on cars should also reverse the trend of aging vehicles. Gas prices remain low. The average age of U.S. vehicles is approaching a record 14 years. Throw in the likelihood of the Fed moving rates lower as early as next month and the likely uptick in new car sales is the what Sirius XM's trial subscription funnel needs to start growing again.
Sirius XM is a growth stock emerging out of its current out-of-favor value stock shell. You just might not see it right now.
