Warren Buffett Invests Big in Sirius XM Amid Market Challenges
Those looking to forge a path in investing could do well to take a cue from the legendary Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) CEO Warren Buffett, often regarded as one of the greatest investors ever. Since assuming control of the firm in 1965, Buffett has an unmatched record, with his stock selections yielding compounded annual gains of nearly 20% and a staggering total increase of 4,384,748%.
Revival of Stock Splits
Stock splits have resurfaced in popularity lately, and it’s easy to see why. Such measures are typically associated with firms that show consistent sales and profit growth, leading to a rising stock price. At times, they can also serve as part of a broader corporate strategy.
Despite offloading hefty portions of Berkshire’s equity portfolio in recent quarters, the so-called “Oracle of Omaha” has been on a buying spree for one stock-split company that he seems quite fond of – Sirius XM Holdings (NASDAQ: SIRI).
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Recent Moves by Buffett
A recent regulatory filing revealed that Berkshire Hathaway has increased its stake in the satellite radio giant by over 3.5 million shares, investing more than $86.7 million in the process. Buffett’s total shareholding now stands at 108.7 million shares, valued at over $2.9 billion as of now. With approximately 339 million shares outstanding, this accounts for about 32% of the company’s total shares.
Understanding the Buy-In
Sirius XM has faced challenges over the years, raising the question: why is Buffett so eager to acquire more shares?
Industry Strength
For one, Sirius XM enjoys a strong position in the satellite radio market. The company boasts 33 million paying subscribers, and when including Pandora, its ad-supported streaming music service, the audience expands to 150 million listeners.
In the second quarter, revenue dipped 3% year over year to $2.18 billion, while earnings per share (EPS) held steady at $0.08. These figures might seem modest, but a deeper look reveals why Buffett is optimistic about this venture.
During this period, Sirius XM generated free cash flow of $343 million. The company’s substantial subscriber base ensures consistent revenue, alongside the advertisements on Pandora. The subsidiary logged 2.6 billion listener hours, helping to maintain solid advertising rates. Buffett values recurring cash flow, and Sirius XM certainly delivers on that front.
There’s also the concern about subscriber losses on its flagship service, which have persisted for several quarters. However, management clarified that the 1.5% dip in paid subscribers stems mainly from unpaid trial subscriptions provided by various automakers. The company garners many customers through these promotional trials.
Recent economic conditions have impacted car sales, leading to fewer new memberships. Additionally, rising costs have caused some consumers to let their subscriptions lapse. Nevertheless, history indicates that a strengthening economy typically boosts consumer spending, which could benefit Sirius XM in the long run.
Advertising and Financial Prospects
Moreover, Pandora’s advertising revenue has shown signs of recovery. While businesses had reduced ad spending during economic difficulties, there is now an upward trend as inflation eases. Although ad revenue remained flat year over year, it increased by 10% sequentially. As the economy improves, Pandora’s advertising income is likely to follow suit.
Buffett may also appreciate the company’s robust dividend, currently yielding approximately 3.9%, which has increased by 166% over the last decade. With a payout ratio of just 28%, there is substantial room for future growth in dividends.
Lastly, there’s the issue of valuation. Sirius XM’s current challenges have dissuaded some investors, leading to a decline in stock price and valuation. The stock presently trades at just 8 times earnings and 1 time sales, which signifies a compelling bargain, an aspect Buffett particularly favors.
Others share Buffett’s view on Sirius XM. Benchmark analyst Matthew Harrigan recently reaffirmed his buy rating, with a price target of $43, suggesting a possible upside of 58% from Monday’s closing price. He noted the market disconnect arising from Sirius XM’s recent merger with Liberty Sirius XM and expressed confidence in the management’s planned initiatives.
Should You Invest $1,000 in Sirius XM Now?
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Danny Vena has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
