The investment giant is buying up a ton of companies.
Berkshire Hathaway took some big steps with Sirius XM (SIRI -0.49%) this month. The investment conglomerate led by Warren Buffett has increased its stake in the audio and entertainment platform to 32%, which is valued at approximately $3 billion at the time of writing. This purchase occurred in connection with Sirius XM consolidating all of its tracking shares into one entity.
The company has struggled with the rise of streaming audio services, with its stock’s total return being negative over the past 10 years while the broader market soared. However, Buffett has been buying lately. Let’s see if you should follow in his footsteps and take a position in Sirius XM stock.
Subscriber stagnation, industry in transition
Sirius XM rose to fame with its satellite radio subscription service. Key to the company’s success was striking agreements with automakers to include its service in the purchase price of a new car, making premium radio service a small addition to a customer’s larger purchase. Today Sirius XM has 33 million subscribers.
The problem is that this is fewer subscribers than in 2018, when Sirius XM had 33.5 million subscribers. Over the past 15 years, the audio industry has shifted from radio services to paid and advertising-based streaming subscriptions such as Spotify. People can now easily connect their smartphones to their cars using Bluetooth, auxiliary cords, or built-in operating systems like Tesla. Spotify has 246 million paid subscribers, a number that has grown roughly 10-fold over the past 10 years.
Sirius XM owns the audio streaming service Pandora, but the segment is struggling compared to Spotify and YouTube. It only had 6 million users last quarter. Spotify and other streaming competitors are significantly larger and dominate the industry. It wouldn’t be surprising if Pandora turned out to be extremely unprofitable for Sirius XM and was on the verge of shutting down within the next few years.
Declining profitability and high debt levels
Executives brag about Sirius XM’s subscriber churn, which was just 1.5% last quarter and consistent with the same period in 2023. This is good. You don’t want a bunch of people unsubscribing every quarter.
However, there are concerns about how much Sirius XM will have to spend to retain those users. The company is known to have expensive content deals, like with Howard Stern, and is increasingly striking deals with podcasts, such as a $100 million deal for Call her dad. Podcasts are the future of talk radio, and Sirius XM is trying to make it happen.
All these expenses did not lead to an increase in income. In fact, revenue is declining, which is impacting the company’s profit margins. Operating margin was 23.3% in the last 12 months, compared to 30% in 2018. And that doesn’t include costs from Sirius XM’s massive debt load, which stands at about $9 billion. Sirius XM’s total interest expense for the last 12 months was $416 million, or a significant portion of its $2 billion operating profit. If revenue continues to fall, profits will continue to fall. But interest expenses will remain the same.
Free Cash Flow SIRI data on YCharts
Should you buy shares?
Simply put, Sirius XM stock is not worth buying. This is far from true.
The stock trades with a market capitalization of $9 billion. Add in $9 billion in debt and you get an enterprise value of $18 billion. Management expects to generate $1.2 billion in free cash flow this year, which is 15 times its enterprise value. Investors should use enterprise value rather than market capitalization to explain Sirius XM’s significant debt. A 15x free cash flow to enterprise value ratio may seem attractive for a growing business, but Sirius XM’s financials are heading in the wrong direction.
In fact, free cash flow peaked many years ago and is showing no signs of recovery. With dwindling subscriber numbers and rising content costs, it looks like Sirius XM’s business will only get worse in the coming years. Don’t follow Buffett and try to catch it. falling knife.
Brett Shafer has positions in Spotify Technology. The Motley Fool has positions in and recommends Berkshire Hathaway, Spotify Technology, and Tesla. The Motley Fool has disclosure policy.