Is This Buffett Stock Doomed?
With over 33 million subscribers as of 2024, Sirius XM seems like a company that has scaled and locked in a wide moat, but is there more to this Buffett stock than meets the eye.
After all, Buffett may be famous for making billions but he’s not immune to picking poor stocks from time to time. See IBM as a prime example. Does Sirius fit into that category or is this an undervalued and unappreciated asset that is on the cusp of rising?
Key Points
- Sirius XM’s unique content and partnerships, including Howard Stern and major sports leagues, create high switching costs that retain users.
- Despite strong margins, Sirius XM faces market saturation, with a 3% revenue decline in Q2 2024 and a loss of 618,000 subscribers in the first half of the year.
- Opportunities for international expansion and increased advertising revenue through Pandora support Sirius XM’s growth.
Why Sirius XM Stands Head & Shoulders Above
Sirius XM is best known as the leader in satellite radio and online radio services and its #1 stature largely stems from its exclusive content and partnerships.
The company offers exclusive channels with well-known personalities like Howard Stern, sports coverage from NFL, MLB, and NASCAR, and a variety of music channels curated by experts which means it’s considerably different from other streaming services like Spotify and Apple Music.
Where Sirius benefits too is from the high switching costs to move to other platforms because once users become accustomed to the personalized and exclusive content offered by Sirius XM, they are less likely to switch to competing services.
With that said, it seems like Sirius has run into problems, perhaps bumping its head up against market saturation issues. For the second quarter of 2024, revenue came in at $2.18 billion, a 3% decline from the previous year. The disappointing decline was slightly below analysts’ expectations of a 2% dip.
On a more positive note, gross margin stands at 60%, while its operating margin is around 25%, both significantly higher than those of many streaming service competitors, thanks to the company’s control over its distribution network and its ability to monetize its exclusive content effectively.
Still Sirius XM is struggling to keep subscribers and ended Q2 2024 with 173,000 fewer satellite-radio subscribers than three months earlier. It actually shed 618,000 subscribers in the first half of the year. The company’s total subscriber base still exceeds 33 million, but the trend is concerning.
What attracted Buffett to the firm is likely the substantial free cash flow which is forecast to be $1.2 billion in 2024. The company also has a strong track record of returning value to shareholders through share buybacks and dividends. Over the past five years, Sirius XM has repurchased over $5 billion worth of its shares, reducing the share count and increasing earnings per share.
So Is Sirius XM a Buy?
There is no doubt that Sirius appears to be hitting the end of the market in the US and that’s caused a lot of concern. But there is significant potential for international expansion. The company can take full advantage of its existing content and technological capabilities to enter new markets and attract a global audience.
With the acquisition of Pandora, Sirius XM can now increase advertising revenue thanks to its large user base that can be targeted with advertising solutions, and driving higher ad revenues.
Another strong factor in its favor is Sirius XM holds a highly dominant position in the satellite radio market, with a market share of over 70%.
Plus income investors don’t have to worry anytime soon that the 3.08% dividend yield is going to be in jeopardy thanks to shareholder-friendly policies.
Looking to valuation, there is meaningful upside with fair value sitting at $5.37 per share according to a discounted cash flow forecast analysis. If that’s anywhere close to being accurate, new buyers at this time have meaningful upside opportunity.
