Since the current bull market first took shape in late 2022 Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) has reclaimed its long-term outperformance of the S&P 500. The conglomerate owns dozens of stocks that have helped fuel its stock's growth and plenty of investors mimic CEO Warren Buffett's investing decisions for Berkshire. Given its strong performance, you'd be wise to poach a few of Buffett's picks for your own portfolio.
There's one particular Berkshire holding that hasn't performed particularly well of late, but could end up vindicating Buffett in a big way beginning in 2025. That's Sirius XM(NASDAQ: SIRI).
Meet the new-and-improving Sirius XM
Yes, this is the Sirius XM that operates North America's only satellite radio service. Despite plenty of indirect competition, the company is still alive and kicking after more than three decades. It owns Pandora as well, rounding out its streaming radio business that includes most of its satellite radio programming.
Investors keeping tabs on the company likely already know its recently reported third-quarter numbers weren't thrilling. Not only was the company's swing to a per-share loss of $8.74 (reflecting a major impairment charge) bigger than expected even without the impact of the charge, but the top line also fell a little more than 4% to just under $2.2 billion. Its paid customer headcount fell again as well.
Data source: Sirius XM. Chart by author. Revenue figures are in millions. Subscriber figures are in thousands.
None of it is encouraging. None of this weakness, however, is permanent either.
Simply put, Sirius XM is a company in the midst of several evolutions. Chief among these transitions is the end of a complicated structural relationship with Liberty Media -- another Berkshire holding -- by virtue of folding Liberty SiriusXM's tracking stock into SiriusXM itself. While seemingly a minor matter, the wind-down of this complex deal has actually been more than a little distracting for nearly a year now.
From here the company can devote more resources to more important things like beefing up its audio content offerings. As CEO Jennifer Witz explained during the company's Q3 earnings call, Sirius XM is adding fresh talent to its existing roster of on-air stars like Howard Stern, Kevin Hart, and a range of sports commentators. Former NFL coach Bill Belichick, podcaster Alex Cooper, and politician Nikki Haley are just some of the new names heard via SiriusXM and Pandora. Notably, the company seems to understand that by defining and segmenting its audience and marketing itself in a way that's relevant to each of them, its platform becomes more of a draw.
In this same vein, in June Sirius XM announced Pandora would be the world's first streaming radio platform to utilize Unified ID 2.0. This technology allows the online radio service to more precisely and effectively deliver advertising to audio listeners. This solution ultimately makes Pandora a more marketable ad platform for would-be advertisers.
And that's going to increasingly matter. See, in step with the advent of ad-supported and ad-subsidized streaming video, Sirius XM Holdings is also now offering more pricing options than it has in the past including as-supported offerings, allowing subscribers to custom-build a package that works well -- and affordably enough -- for them.
But none of this has seemingly helped yet. The subscriber base continues to dwindle. So does revenue and profits.
Don't worry -- it's coming
It's admittedly been (another) long year for shareholders. The stock's been more than halved since the end of 2023, reaching a 12-year low just last month. Investors are really, really concerned the audio entertainment business is on the ropes, and might be KO'd before bouncing back. And it's not a completely unmerited worry.
There's a reason Warren Buffett is remaining patient with Berkshire Hathaway's 112.5 million share/$2.9 billion stake in Sirius XM Holdings, however. That is, the bulk of this company's overhaul efforts have yet to make their full impact. It will take some time for consumers to find the company's new programs, just as it will take some time for consumers to realize they've got much more pricing flexibility than they've had before. Advertisers will need some updated education regarding all their options, too.
The upside is coming though, in more ways than one.
One of these bigger ways is profit growth stemming from less spending on satellites. As the business continues to shift online and away from actual satellite-delivered programming, Sirius XM expects this year's projected capital expenditures on satellites of around $300 million will dwindle to nil by 2028. Non-satellite capital expenditures, meanwhile, will not only not go up, but will also cool off just a bit for the same time frame.
Image source: Sirius XM Q3 2024 investor presentation.
Subscriber growth is brewing, too, driven by efforts already seen in addition to one that has yet to be unveiled. For instance, recently forged agreements with carmakers Ford Motor Company and Toyota Motor mark the beginning of revitalized reach within the automobile industry.
Sirius is also teasing the launch of new ad-supported subscriptions and even more interactive programming at some point in the foreseeable future. Although it remains to be seen exactly what these will be, the company believes all of the aforementioned will be enough to drive its current subscriber headcount from around 40.5 million now to roughly 50 million down the road. At that number of listeners, Sirius XM expects to be generating annual free cash flow on the order of $1.8 billion, versus last year's $1.2 billion.
Of course, the growth doesn't have to end there.
Just take Buffett's hint already
The waiting is the hardest part.
Although the stock is due for a rebound, there's no assurance it will take shape beginning in the early part of 2025 ... if it takes shape at all. Perhaps it won't, if the majority of investors continue to doubt the company's revitalization plans will ever take hold on a permanent basis.
Buffett and his lieutenants are sticking with Sirius though. That speaks volumes, and even more so given that Berkshire's been shedding huge chunks of stalwart names like Apple and Bank of America this year. He and his team clearly see something bullish for Sirius XM ahead here. Perhaps they recognize that all of the aforementioned projects will take time to bear fruit. He and his team will be collecting a solid dividend in the meantime; newcomers will be stepping in while the forward-looking yield stands at 4.1%.
Whatever the case, while it will never be a growth name, if it's (still) good enough for Buffett, it might be at home in your portfolio as well while you can scoop it up at such a nice discount.
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Bank of America is an advertising partner of Motley Fool Money. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy.
