Will New Buffett Buy 10x?

Last year, Warren Buffett surprised practically everyone when he acquired more than 30% of embattled internet radio giant Sirius XM (NASDAQ:SIRI).

At first, Buffett appeared to be taking advantage of an arbitrage opportunity, but subsequent purchases have suggested that the Oracle of Omaha is more interested in building a long-term position in Sirius XM.

Given Buffett’s success over the years, this raises the question of whether Sirius XM could be a 10-bagger stock that Berkshire Hathaway is wisely getting in on the ground floor of.

Key Points

• Warren Buffett’s sizable investment highlights Sirius XM’s strong market position in vehicle-based internet radio and extensive content library, despite recent revenue and earnings stagnation.
• While Sirius XM reported a $2.96 billion Q3 loss, management’s focus on user value, content curation, cost-cutting, and debt reduction aims to drive a turnaround.
• Sirius XM’s low valuation and a 4.8% dividend yield suggests undervaluation.

Is Sirius XM Set to Pop?

To appreciate to 10 times its current value, Sirius XM will have to be able to consistently increase its earnings over time. Lately, however, the company’s performance has been moving in a much less positive direction.

Revenues have been flat or moderately declining since late 2022, and the year before that saw only modest single-digit growth. Net income, likewise, was basically flat through most of the period from 2021 to 2024.

In its most recent earnings report, Sirius revealed that its self-pay subscriber count had increased by a net amount of 14,000. This boost, however, wasn’t enough to help drive revenue growth, as the earning report noted lower subscriber revenue that contributed to a 7% reduction in EBITDA. The net loss for Q3 was $2.96 billion, though this was mostly the result of a non-cash impairment charge.

With that said, there’s still a great deal to like about Sirius XM. To begin with, the company has a very strong position in the market, being by far the largest provider of internet radio to vehicle owners.

Sirius XM also has a massive content base across its channels, giving it a moat that would be difficult for other internet radio providers to breach. These factors may have played a role in attracting Buffett to the stock in the first place, as he’s known to favor stocks with entrenched competitive advantages.

The company also recently announced its longer term plans going forward. To improve results, management plans to focus heavily on maximizing the value of its vehicle user base while also continuing to curate more content to keep audiences engaged. These efforts, paired with debt reduction and cost-cutting measures, are expected to help the company get back on a growth footing.

Taking all of these factors into account, it seems that Sirius XM will be ripe for a new period of growth, though it’s starting from something of a rocky baseline. If management really can reduce expenses and improve earnings, it’s quite likely that the stock will begin to move upward. This is especially true in light of the attention Buffett’s buying activity has brought to SIRI shares, as the market will likely be watching for any indications of good news at Sirius.

Do Analysts See Upward Movement in Sirius XM?

Although Sirius XM almost certainly won’t become a 10-bagger in the short run, it may be useful to see what analysts expect from the stock over the next 12 months to get a sense of Wall Street’s sentiment around SIRI.

The average price forecast for Sirius XM right now is $25.54, implying about 14.7% of upside from its most recent price of $22.27.

To some degree, the stock’s price could improve as a result of ongoing share buybacks. While Sirius XM’s growth has been lackluster for some time, the company generates a considerable amount of cash flow which it allocates to repurchasing shares and paying dividends.

The company has been drawing down its outstanding share count fairly consistently since the early 2010s. Right now, the stock looks fairly cheap, and it’s possible that management will take this opportunity to retire some more of the company’s shares.

As far as its dividend goes, SIRI stock yields about 4.8% and pays $1.08 annually per share. In its update, management stated its commitment to maintaining this dividend level. So, while appreciable dividend growth may have to wait for Sirius XM’s earnings to start growing again, it at least doesn’t appear that a dividend cut is on the horizon.

A Closer Look at SIRI’s Valuation

Another important factor in Sirius XM’s ability to compound over time is its valuation. Thanks to a 59% selloff during the last 12 months, the internet radio company looks quite appealing.

Several of SIRI’s key valuation metrics even suggest that the stock could be undervalued. Sirius trades at 10.7x earnings, 1.0x sales and just 0.7x its book value.

That said, the stock’s otherwise very favorable multiples are somewhat counterbalanced by its price-to-earnings-growth ratio, which is 1.9 when compared to expected growth over the next five years.

So, How Likely Is It That Sirius XM Could Be a 10-Bagger?

The term “10-bagger” is credited to Peter Lynch, the now-famous manager of the Fidelity Magellan fund in the 1980s. Another of Lynch’s contributions to the world of investing was the very simple axiom that a stock’s price was highly correlated to its earnings. In other words, for a stock to go up 10 times, its earnings would have to increase by a roughly similar amount.

This view from Lynch neatly explains why Sirius XM is unlikely to become a 10-bagger unless something about its business changes significantly for the better. Even with the boost from ongoing share buybacks, it seems unlikely that Sirius XM will suddenly be able to increase its earnings nearly+ tenfold after several years of stagnant net income growth.

With that said, a stock doesn’t necessarily need to be a 10-bagger to be worth investing in. Right now, there are several signs that SIRI shares could be undervalued and that the company could turn its performance around enough to start trending upward again.

Sirius XM’s strong competitive position gives it a solid platform on which to build, and the company has a credible plan to improve its financial standing over the next couple of years. Paired with a high dividend that the company is committed to maintaining, these factors may make SIRI an appealing investment even without 10-bagger potential.