If investors are looking for new ideas to put money into, it's a good idea to see what Warren Buffett-led Berkshire Hathaway owns. The Oracle of Omaha's investing track record speaks for itself, and some of his holdings might just be able to boost your own portfolio.
The conglomerate has a massive $304 billion public equities portfolio. While Sirius XM (SIRI -2.30%) only represents a tiny 0.9% of the total assets, it's worth mentioning that Berkshire owns 37% of the outstanding shares of the satellite radio operator. That's a significant stake.
When viewing this opportunity, there are compelling arguments to be made on both sides of the aisle. Where will Sirius XM stock, which has tanked 60% in the past five years, be five years from now?
Image source: Getty Images.
Facing headwinds in the internet age
The most worrying trend facing Sirius XM is that its business is in decline. Revenue and subscribers fell on a year-over-year basis in Q2 (ended June 30). One clear factor working against the company is the rise of online streaming platforms that provide a wonderful user experience, with a vast selection of audio and video content, all at low monthly fees. Better smartphone quality and improving internet connectivity mean that people can access these services across the U.S.
For what it's worth, Sirius XM can see meaningful new subscribers when car sales surge. That's because new cars typically come with free trials of the radio subscription, which creates a potential pool of eventual self-pay customers. The bulls will call out the prospects of lower interest rates going forward as a reason to be optimistic about car sales, and Sirius XM subscriber gains, as we look ahead. This view makes sense.
However, it's important to realize that the U.S. auto market is extremely mature. In August, 16.5 million vehicles were sold on a seasonally adjusted basis, less than the same month 10 years ago. Unless there's a huge jump in the population of people who can drive, I don't see this being a catalyst for Sirius XM's long-term success.
Forecasting rising free cash flow
One of the bright spots is that Sirius XM generates 76% of its total revenue from subscriptions, which bring in a recurring revenue stream. This part of the business is not nearly as cyclical as advertising, which can shift with the broader economy.
Another reason to like this business is that it's consistently profitable. Sirius XM reports positive net income that supports free cash flow (FCF). Management expects the company to produce over $1.1 billion of FCF in 2025. By 2027, the forecast calls for $1.5 billion. That's certainly an encouraging outlook.
As capital expenditures come down, the thinking is that FCF will get a boost. At some point in the future, though, Sirius XM might need to increase capital investments once again in order to maintain a working satellite fleet. This would be a hit to FCF.
Sirius XM is a risky bet, but the stock's valuation is cheap
Investors can achieve some of the best returns by buying shares in high-quality companies that are growing. This usually means that these businesses are benefiting from secular tailwinds that are working in their favor. Unfortunately, Sirius XM is on the wrong side of tech-driven trends.
Consequently, it's very risky to own a stock that's facing headwinds like Sirius XM is, particularly with the popularity of digital-first streaming platforms. It's not crazy to believe that five years from now, the company's revenue and subscriber base will be lower than they are today. That's a difficult situation to put your hard-earned savings behind.
For what it's worth, the market seems to already be pricing in weak expectations. Shares trade at a dirt cheap forward price-to-earnings ratio of 7.6. This supports a robust dividend yield of 4.75%.
Buying Sirius XM might make sense for deep-value investors that care about a low entry multiple. However, investors that are focused on owning top-notch companies should stay away. I think there's a good chance that the stock will disappoint between now and the fall of 2030.
