Sometimes the market presents unique opportunities to get an even bigger discount on a stock that's already trading at an attractive price. Warren Buffett's Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) appears to be latching onto one of those opportunities right now.
Berkshire Hathaway bought a combined $167.5 million worth of Liberty SiriusXM(NASDAQ: LSXMA)(NASDAQ: LSXMK) tracking stock in April, bringing its total position to about $2.6 billion. The tracking stock closely follows Liberty Media's position in Sirius XM(NASDAQ: SIRI), of which the media company owns 83%. Berkshire's also an investor in Sirius XM, although its total investment currently stands at just $125 million as of its most recent update.
But there's a good reason for Buffett to favor the Liberty tracking stock over shares of Sirius XM. It's getting a nice discount.
Image source: The Motley Fool.
How investors can get a discount on Sirius XM
Back in December, Sirius XM and Liberty agreed to merge the two stocks. The merger is expected to be completed in the third quarter when Liberty SiriusXM shareholders will receive 8.4 shares of Sirius XM stock per share of the tracking stock they currently own.
At current market prices, 8.4 shares of Sirius XM are worth about $26.20. Meanwhile, the Liberty tracking stocks trade around $25.13. As such, investors buying into Liberty SiriusXM are getting an extra 4% discount (roughly) on shares.
That discount used to be much wider. When the merger was first announced in December, investors could get a massive 39% discount by buying the tracking stock instead of Sirius XM.
But there were good reasons for that discount. Strong short interest in Sirius XM last year made the stock hard to borrow. That hindered price discovery, resulting in shares trading above their market value. The Liberty SiriusXM tracking stock therefore offered a better reflection of the market's value of Sirius XM's operations. As short interest has come down amid Sirius XM's falling stock price, the discount for shares of the Liberty SiriusXM tracking stock has shrunk.
But there's still a small discount. And that reflects that there is some risk versus owning shares of Sirius XM directly. The merger is still months away and it's still possible Sirius XM shareholders sue to stop the deal, finding it too favorable for Liberty Media. However, as time goes on, that appears less and less likely. In all likelihood, the merger will go through as planned.
So, investors can currently get a discount on Sirius XM shares, albeit a smaller discount than they could previously. Should they follow Buffett and Berkshire Hathaway into the stock?
Is Sirius XM worth owning?
Sirius XM is the largest satellite radio company in the United States, serving 33 million subscribers. Unlike terrestrial radio stations, which make most of their revenue from on-air ads, Sirius makes most of its money from subscriptions.
That said, Sirius has struggled to grow recently. Its first-quarter subscriber revenue fell by a small amount year over year, although advertising revenue, primarily from its Pandora streaming service, made up for the decline. Subscriber churn also ticked up a tenth of a percentage point, but that's not uncommon seasonality for Sirius.
The company may be about to turn a corner, though, reinvigorating revenue growth. The top of Sirius's subscriber funnel -- free trials for new car purchasers -- swelled to 7.5 million at the end of the first quarter. That compares to 7.2 million at the end of last year as well as the end of the first quarter of 2023. Management expects subscriber growth to pick up in the second half of the year as a result.
Sirius XM's biggest challenge is the growth of streaming services. While Sirius benefits from much more favorable economics than streaming, resulting in a higher profit margin and free cash flow conversion, the competition is a drag on its subscriber growth. To that end, it acquired Pandora in 2019 and offers a streaming version of its satellite radio service. It's also invested heavily in podcasts and revamped its mobile app. Programmatic ad sales increased 29% across streaming and podcasting in the first quarter, helping drive total ad revenue 7% higher year over year.
The revamped app and a push to acquire more exclusive podcasts could benefit subscriber conversion from free trials. It's also working with manufacturers to include its newest 360L system, which offers an improved user experience, including more personalized listening recommendations. Sirius has found a higher conversion rate for trial members with 360L than without it.
With a growing funnel of new subscribers, traction in its digital ad sales, and incremental investments in podcasting, Sirius looks poised to return to subscriber growth. Meanwhile, the stock trades at just 10.1 times forward earnings estimates and an EV/EBITDA ratio of just 8.2. If you can get a further discount by buying the Liberty Media tracking stock, it looks even more attractive.
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Adam Levy 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.
