It's been a rough three years for Sirius XM Holdings (SIRI +1.90%). Shares of the satellite radio operator have plummeted 65% in that time. Some of the downticks are warranted. After more than two decades of consistent annual top-line growth, revenue has declined slightly in each of the past three years.
There's still a lot to like in the media stock. Sirius XM continues to generate annual free cash flow north of $1 billion. Its trailing net profit margin is in the double digits. Meanwhile, the sluggish shares have pushed the stock's dividend yield above 5% and its forward earnings multiple into the single digits.
Is Sirius XM too cheap to ignore at this point? As bad as the last three years have been, I believe that the next three years offer opportunities for Sirius XM investors to make back a lot of the ground that it has squandered in recent years.
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Stern warning
There's at least one way that Sirius XM's platform could be materially different three years from now. Sirius XM's biggest star is unlikely to still be cranking out live programming in 2029. Howard Stern signed a three-year contract last month, a deal that was unusual for a couple of telltale reasons.
Through his first two decades on the platform, Stern signed five-year agreements. Reports circulated last summer that Sirius XM and the legendary morning show host were ready to part ways at the end of 2025. The shorter deal this time could signal that Stern is transitioning away from the satellite radio monopoly.
Another sign that Stern -- who turns 72 next week -- is nearing the end of his historic run at Sirius XM is that he mentioned last month that the new contract provides him more flexibility to enjoy his golden years. In short, there should be fewer live shows in the next three years.
Stern has more than earned his freedom, and Sirius XM can use the extra financial wiggle room after reportedly spending nine figures annually to keep his show on the air in the past. With revenue declining marginally in each of the last three years and subscribers peaking just before the pandemic hit six years ago, you can't blame Sirius XM for shaking the Etch-a-Sketch.
The platform's dip in popularity isn't Stern's fault. He is likely a significant reason why the three-year decline in revenue has resulted in only a 5% overall decrease. The churn rate of its subscriber base remains near its historical lows. The problem has been Sirius XM's inability to resonate with younger listeners who have grown up on free or nearly free streaming apps and the optionality of the connected car.
Sirius XM is already investing in podcasters who are popular with the youngest generation of car drivers. It's pushing the streaming companion to its live broadcasts, giving folks the content they want on their terms. The biggest challenge in the turnaround effort has been a general lack of young drivers, but this could change in the coming years.
NASDAQ: SIRI
Key Data Points
Driving in the direction of growth
Analysts see a return to marginal top-line growth in each of the next three years. Just as the decline in the past three years is modest, the same can be said for the windshield view. Wall Street pros are targeting $8.6 billion in revenue come 2028, a mere 0.8% uptick from today's trailing results.
The bottom line should see a heartier lift. The $3.43 a share in reported earnings that analysts are modeling is a 25% jump. Aggressive stock buybacks and operating efficiencies can deliver respectable growth in per-share profitability.
If Sirius XM is ready to start growing its overall business again, the stock should beat the market over the next three years. Sirius XM is cheap, trading for less than 7 times forward earnings. The stock's generous and sustainable 5.1% dividend yield should keep growing with its per-share profit growth. The payouts will become even more attractive if short-term interest rates continue to decline, which could also spur a boost in auto loan financing, a key factor in attracting more new drivers to the Sirius XM free trial funnel.
The wildcard in all of this is Berkshire Hathaway (BRK.A +0.71%) (BRK.B +0.72%). It is now Sirius XM's largest shareholder, with a 37.1% stake in the company. Will Berkshire Hathaway investors continue to add to their position as they have over the past two years? Will Berkshire Hathaway buy Sirius XM outright? Will it trim its position or sell it entirely?
Berkshire Hathaway's portfolio decision will rock Sirius XM higher or lower. Outside of that, if the radio giant can succeed in growing its business again -- no matter how slowly -- the stock should deliver double-digit annualized total returns in the next three years.
