Berkshire Hathaway has made some big steps Sirius XM (NASDAQ: SIRI) this month. The investment conglomerate led by Warren Buffett has increased its position in the audio and entertainment platform to 32%, which is worth around $3 billion at the time of writing. This purchase occurred in conjunction with Sirius XM combining all of its tracking shares into one entity.
The company has struggled with the rise of streaming audio services, with its shares posting negative total returns over the past decade while the broader market has soared. Lately, though, Buffett has been buying. Let’s see if you should follow in his footsteps and take a position in Sirius XM stock.
Sirius XM rose to fame with its satellite radio subscription service. The key to the company’s success was entering into agreements with car manufacturers to bundle the service with the purchase of a new car, making the premium radio service a small add-on to a major customer’s purchase. Today, Sirius XM has a total of 33 million subscribers.
The problem is that these are fewer subscribers than in 2018, when 33.5 million people subscribed to Sirius XM. Over the past fifteen years, the audio industry has transitioned from radio services to paid subscriptions and streaming subscriptions for advertising, such as Spotify. People can now easily connect their smartphones to cars via Bluetooth, extra cords or built-in operating systems like in a Tesla. Spotify has 246 million paying subscribers, a number that has grown by about ten times over the past decade.
Sirius XM owns a streaming audio service, Pandora, but this segment has struggled mightily compared to Spotify and YouTube. Last quarter it had just 6 million total users. Spotify and other streaming competitors are significantly larger and have a leading edge in the industry. It wouldn’t be surprising if Pandora was very unprofitable for Sirius XM and was on track to close within a few years.
Management brags about Sirius You don’t want a lot of people unsubscribing every quarter.
However, there are concerns about how much Sirius XM will have to spend to retain these users. The company is known for having expensive content deals, such as with Howard Stern, and is increasingly pursuing podcast deals, such as the $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. Sales have actually fallen, which has impacted the company’s profit margins. Operating margin was 23.3% over the last twelve months, compared to 30% in 2018. And this doesn’t include the cost of Sirius XM’s massive debt load, which is approximately $9 billion. Sirius If sales continue to decline, profits will continue to decline. But the interest charges remain the same.
Simply put, Sirius XM stock is not a buy. Far from it.
The stock trades at a market cap of $9 billion. Add in debt of $9 billion and you have an enterprise value of $18 billion. This year, management expects to generate $1.2 billion in free cash flow, or 15x enterprise value. Investors should use enterprise value, not market cap, to account for Sirius XM’s significant debt. Free cash flow 15 times a company’s enterprise value may seem attractive for a growing company, but Sirius XM’s financials are moving in the wrong direction.
In fact, free cash flow peaked many years ago and shows no signs of recovery. With subscriber numbers declining and content costs rising, it appears that Sirius XM’s business will only deteriorate in the coming years. 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 holds positions in and recommends Berkshire Hathaway, Spotify Technology, and Tesla. The Motley Fool has a disclosure policy.
Warren Buffett Continues to Buy Sirius XM Stock: Should You? was originally published by The Motley Fool
