Sirius XM (SIRI 0.28%) has been getting a lot of attention recently, primarily because it's a top Warren Buffett stock. Berkshire Hathaway owns 37.1% of the outstanding shares in the satellite radio operator. Average investors who follow the Oracle of Omaha's moves might be wondering if they should consider Sirius XM as well for their own portfolios.
It's important to think about what the long-term investment thesis is, what factors matter most when looking at the business, and if there's any upside. If you buy shares of Sirius XM right now, will you become a millionaire one day?
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Sirius XM is facing a big headwind
Sirius XM has an advantage because it's the only satellite radio operator in the U.S. As a result, there won't be any direct rival encroaching on its turf. But that might be where the good news ends.
The rising penetration of the internet and smartphones has created a major headwind for the business. Advancements in these technologies have propelled popular streaming services that consumers can easily access from more parts of the country. There is naturally less of a dependence on satellite-based radio when internet connectivity is much faster and more reliable.
Sirius XM has been on the wrong side of technological change. During the second quarter, its revenue decreased year over year, and the Sirius XM service lost subscribers. Wall Street analysts believe the top line will fall by nearly 2% between 2024 and 2027, which shouldn't drive investor excitement.
It's hard to believe that the company's growth trends are going to improve in the near future. A big chunk of Sirius XM's customer acquisition comes from car purchases that come with free trial members, who then might stick around for a paid subscription after. It's no surprise that if car sales surged, then Sirius XM would also see better user growth.
But in the month of August, there were 16.8 million passenger vehicles sold in the U.S. on a seasonally adjusted annual basis. That figure is less than in the same month 20 years ago in 2005. Sirius XM can't bank on car unit sales posting solid growth over the long term.
Management believes free cash flow can soar
Sirius XM does deserve credit because about three-fourths of its revenue comes from subscriptions. This is a recurring, predictable source of sales that adds stability to the business.
And Sirius XM is consistently profitable. It generated $402 million of free cash flow (FCF) in Q2. After forecasting $1.15 billion of FCF in 2025, management believes the company will collect $1.5 billion in 2027, translating to a 30% growth rate. This will come from the expectation that capital expenditures will decline materially going forward, particularly as they relate to satellite launches. This can have a big impact on FCF, so investors should pay attention to these data points.
Investors might want to think twice
Buffett and his team clearly see some things they like. Sirius XM is generating positive FCF with a subscription-based model. And the shares are extremely cheap. They trade at a price-to-earnings ratio of 7.3. The market has completely soured on the company, whose share price is down 63% in five years (as of Oct. 16).
From a pure value investing perspective, Sirius XM might be of interest to some. However, it's difficult to believe that the stock can generate robust returns over the very long term. It clearly doesn't help that Sirius XM is facing technological headwinds, as consumers flock to what they believe provides the best user experience when it comes to audio entertainment.
There's a very low probability that Sirius XM will turn investors into millionaires one day. And for those still considering buying the stock, it's best to proceed with caution.
