Sirius XM (SIRI +3.01%) is the only satellite radio operator in the U.S. While this might seem like a favorable competitive position to be in, it hasn't helped the shares in the slightest. They have tanked 67% in the past five years (as of Nov. 19). This certainly isn't an encouraging trend.
There might be one critical factor hindering this business. Investors shouldn't think about buying this mid-cap stock until this big thing happens.
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The business must grow its subscriber base
It's clear what Sirius XM needs to do in order for it to be worthy of investment dollars. The business must start to grow its subscriber base on a consistent basis. This has been a challenge.
The Sirius XM platform concluded the third quarter (ended Sept. 30) with 31.2 million self-pay subscribers. That figure was down from 31.5 million reported one year before. And the figure has steadily declined in the last three years, pressuring revenue in the process.
That's undoubtedly a troubling statistic. Investors generally want to own companies that can grow their customer counts and increase sales along the way. This is a clear indicator of a business that's finding greater adoption.
It's not a stretch of the imagination to believe that Sirius XM is on the wrong side of technological innovation. Faster internet speeds, broader connectivity, and more advanced smartphones have created an environment for digital streaming platforms from the likes of Apple, Alphabet, and Spotify to flourish. This makes subscribing to a satellite radio service less compelling of a value proposition for consumers.
NASDAQ: SIRI
Key Data Points
Shares are cheap, with a high dividend yield
Despite the growth struggles, investors might still be bullish on Sirius XM. For starters, it generates a significant chunk of its revenue from predictable and recurring subscriptions, as opposed to cyclical advertising revenue.
And it's highly profitable. Free cash flow (FCF) surged 176% year over year to $257 million in the third quarter. Executives believe FCF will total $1.5 billion in 2027, up from an expected $1.225 billion this year.
The fact that Warren Buffett-led Berkshire Hathaway owns 37% of Sirius XM's outstanding shares can also instill confidence in the investment community. The Oracle of Omaha and his team were likely drawn to the huge cash profits. What's more, Sirius XM trades at a bargain forward price-to-earnings ratio of 6.9. And the dividend yield is hefty at 5.24%.
However, the average investor should think twice before buying this stock. If subscriber growth resumes, then the situation will be a lot more interesting.
