A curious stock purchase landed on the Berkshire Hathaway 13-F this quarter: Sirius XM. The team at Berkshire, led by Warren Buffett, increased its position by 262% in the quarter after the stock began to fall precipitously, with shares down around 50% year to date. Seeing as this was just a small position in the Berkshire portfolio, it is possible that Todd Combs or Ted Weschler, Buffett's lieutenants, bought the stock for Berkshire Hathaway. Either way, the legendary conglomerate is increasing its exposure to the audio, music, and car radio platform.
Should you buy shares along with it? Sirius XM is a subscription audio service with satellite connectivity and a focus on automobiles. It signs deals with automotive manufacturers to bundle subscriptions to Sirius XM with car purchases. The company has 33 million total subscribers who listen to Sirius XM music, talk radio, and podcasts. While this may seem like a lot of subscribers, Sirius XM has been stagnating for years as YouTube (owned by Alphabet's Google) and Spotify Technology have taken over the audio market. Last quarter, Sirius XM lost 100,000 subscribers. YouTube has billions of users daily, and Spotify has added close to 100 million new paid subscribers since 2020, triple Sirius XM’s total subscriber count. Clearly, Sirius XM is feeling the heat with these modern audio competitors.
Management is making splashy signings for exclusive content such as the top podcast, Call Her Daddy, which was previously a Spotify exclusive. The deal will cost $125 million. Sirius XM hopes big signings like this show can lead to growth in advertising revenue. However, advertising revenue did not actually grow last quarter. If the company is going to get a positive return on investment with these content deals, Sirius XM will need to attract more advertising dollars to its platform.
Over the last 12 months, Sirius XM generated $8.9 billion in revenue. This is up significantly from its $4 billion revenue base 10 years ago. Revenue has begun to stagnate, though, and has been close to flat over the last two years. Free cash flow looks much worse. Free cash flow has round-tripped back to $1.1 billion over the last 12 months, which was the same level of cash flow the company generated 10 years ago. For years, it was closer to $1.5 billion or higher, indicating that the health of Sirius XM's business is getting worse. Competitive threats from YouTube and Spotify are eating away at its subscriber base. Sirius XM just doesn't have the modern product to match these new players. Plus, fewer people care about a car radio entertainment system nowadays.
Sirius XM is saddled with a lot of debt. At the end of last quarter, it had $9 billion in long-term debt that will be due in varying degrees from 2024 to 2031. If the company only generates around $1 billion in free cash flow a year, it will struggle to pay back these loans or will risk having to refinance with more expensive loans. Either way, it is a negative for the stock.
Is the stock a buy? One of the most respected investment teams – Berkshire Hathaway – is buying shares of Sirius XM. I just can't understand why. Yes, Sirius XM trades at a market cap of $11 billion, which is just 10 times its free-cash-flow figure. This does look cheap. However, investors need to remember the $9 billion debt drag on the company's balance sheet and that free cash flow is moving in the wrong direction. If these expensive content deals from the likes of Call Her Daddy don't pan out, free cash flow will continue to get worse each year. The business could spiral out of control quickly. Sirius XM is facing an existential threat from YouTube and Spotify. The problem has gotten worse over the last five years, and it is likely to only get worse over the next five years. For this reason, individual investors should avoid buying Sirius XM stock right now.
