Berkshire Hathaway has made some big moves with Sirius XM(NASDAQ: SIRI) this month. The investing conglomerate led by Warren Buffett has increased its position in the audio and entertainment platform to 32%, worth around $3 billion as of this writing. This buying occurred in conjunction with Sirius XM combining all of its tracking stocks into one entity.
The company has struggled with the rise of streaming audio services, with the stock posting a negative total return over the last 10 years while the broad market has soared. However, lately Buffett is buying. Let's see if you should follow in his footsteps and take a position in Sirius XM stock.
Stagnating subscribers, transitioning industry
Sirius XM rose to fame with its satellite radio subscription service. The key to the company's success was making deals with automakers to bundle its service with a new car purchase, making the premium radio service a small add-on to the large customer purchase. Today, Sirius XM has 33 million total subscribers.
The problem is, this is less subscribers than it had in 2018, when it had 33.5 million people subscribed to Sirius XM. Over the last 15 years, the audio industry has transitioned from radio services to paid and advertising streaming subscriptions such as Spotify. People can now easily connect their smartphones to cars with Bluetooth, auxiliary cords, or built-in operating systems like in a Tesla. Spotify has 246 million paying subscribers, a number that has grown by around 10x in the last 10 years.
Sirius XM owns a streaming audio service, Pandora, but this segment has struggled mightily compared to Spotify and YouTube. It only had 6 million total users last quarter. Spotify and other streaming competitors are significantly larger and have a commanding lead in the industry. It wouldn't be surprising if Pandora were highly unprofitable for Sirius XM and on the way to closing down within the next few years.
Thinning margins and high levels of debt
Management brags about Sirius XM's subscriber churn, which stood at just 1.5% last quarter and was consistent with the same period in 2023. This is a good thing. You don't want a bunch of people unsubscribing every quarter.
However, there are concerns over how much Sirius XM needs to spend to retain these users. The company famously has expensive content deals like with Howard Stern, and is increasingly pursuing podcast deals like its $100 million deal for Call Her Daddy. Podcasts are the future of talk radio, and Sirius XM is trying to make the pivot.
All this spending has not led to revenue growth. In fact, revenue has been declining, which has impacted the company's profit margins. Operating margin was 23.3% over the last 12 months compared to 30% in 2018. And this doesn't include expenses from Sirius XM's huge debt load, which stands at around $9 billion. Sirius XM's total interest expense was $416 million over the last 12 months, or a large chunk of its $2 billion in operating earnings. If revenue keeps falling, profits will keep falling. But the interest expense will stay the same.
SIRI Free Cash Flow data by YCharts
Is the stock a buy?
Simply put, Sirius XM stock is not a buy. Far from it.
The stock trades at a market cap of $9 billion. Add back its $9 billion in debt and you have an enterprise value of $18 billion. This year, management expects to generate $1.2 billion in free cash flow, or 15x its enterprise value. Investors should use enterprise value and not market cap to account for Sirius XM's sizable debt. A 15x free cash flow multiple to a company's enterprise value may seem attractive for a growing business, but Sirius XM's financials are headed in the wrong direction.
In fact, free cash flow peaked many years ago and is showing no signs of recovering. With subscriber declines and rising content costs, it looks like the Sirius XM business will only deteriorate in the years to come. Don't follow Buffett and try to catch this falling knife.
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Brett Schafer has positions in Spotify Technology. The Motley Fool has positions in and recommends Berkshire Hathaway, Spotify Technology, and Tesla. The Motley Fool has a disclosure policy.
