Sirius XM (SIRI 1.11%) is one of the most polarizing stocks in the media space.
On paper, it appears to be a classic value play: a sticky subscription business, substantial free cash flow, generous buybacks, and a solid dividend. Yet the market isn't buying it -- shares are down 34% in the last 12 months (as of writing), and sentiment remains firmly negative.
So what's going on? Is Sirius XM genuinely undervalued -- or is it cheap for a reason?
Let's break it down.
Image source: Getty Images.
The bull case: A cash cow with recurring revenue
Sirius XM's biggest strength is its predictable revenue stream. In 2024, 76% of its $8.7 billion in revenue comes from subscriptions, providing a predictable cash flow. That year, free cash flow was $1 billion. That kind of recurring, high-margin revenue is increasingly hard to find in a media landscape dominated by ad-dependent business models.
While not the sexiest, Sirius XM's core satellite radio business remains sticky among car owners, who often auto-subscribe after buying a new or used vehicle. This captive audience has enabled Sirius to maintain churn rates under 2% over the last five years, reflecting the strength of its business model.
Meanwhile, Sirius has returned nearly $7.5 billion to shareholders over the past seven years through share buybacks, reducing a substantial portion of the share float. Moreover, it has consistently paid dividends over the last decade, further rewarding shareholders. Its investor-friendly capital allocation strategy may have explained Berkshire Hathaway's massive stake in the company.
So, for value investors, the setup is appealing: a high-cash-flow business, ongoing share buybacks, and a management team committed to paying dividends.
The bear case: Growth is negative
Despite all the positive factors mentioned, Sirius XM has not garnered much investor support. For perspective, the stock trades recently at a price-to-free-cash-flow (P/FCF) ratio of 7.3 times, which was down around 50% over the last five years. So what's the problem?
The primary reason is that the company has struggled to grow in recent years. In fact, revenue declined in the last two years, down from $9 billion to $8.7 billion. While the magnitude of the decline has been modest, it highlights the challenge the media company has in transitioning its business model. For instance, paid subscribers peaked at 34.9 million in 2019 and have since slowly declined to 33.2 million as of 2024.
While the broader audio space is booming (just look at Spotify's podcast pivot or YouTube's recent success), Sirius has yet to find its niche, even after acquiring Pandora. So far, the streaming and podcast business still hasn't lived up to expectations. Its revenue has remained roughly flat at around $2 billion over the last four years, while monthly active users have been declining during this period.
In other words, Sirius XM is stuck between two worlds: a legacy satellite business with limited growth potential, and a digital platform that's struggling to compete. More importantly, without a compelling growth story, even a "cheap" multiple can be misleading. Valuations tend to compress -- and stay compressed -- when the market sees a declining business.
Is the stock a bargain or not?
It depends.
If investors believe Sirius XM can stabilize its subscriber base, extract more value from Pandora, and maintain strong free cash flow, then the stock could offer solid returns through dividends and buybacks alone.
Furthermore, the company is experimenting with new ways of monetization, which include its low-priced ad-supported subscription service, and is also working hard to turn around its podcast business by steering it beyond its legacy car user cohort. If these initiatives become just mildly successful, then today's valuation may look like a gift.
On the other hand, there's a possibility that the current decline in revenue and subscriber base proves to be structural, and that the company fails to transition itself to a new sustainable business model. In this context, the stock's low valuation isn't a bargain, but rather a reflection of the market pricing in a structural decline.
Worse, these failed "value stocks" often remain cheap or become cheaper.
What does it mean for investors?
Sirius XM shares appears cheap -- but only if the company can halt its revenue decline and sustain its cash flow. Without growth, it's hard to see meaningful upside.
Investors seeking a stable, cash-generating business may find value in this opportunity. Just don't expect this stock to race ahead anytime soon.
