Warren Buffett’s Berkshire Hathaway recently increased its stake in satellite radio company Sirius XM by 262% during the second quarter. The move came as a surprise to many, as Sirius XM’s stock has fallen more than 50% over the past three years, while the S&P 500 has gained 35%. However, a closer look at Sirius XM reveals several reasons that align with Buffett’s investment philosophy.
The company generates most of its revenue from subscriptions, which tend to have high margins and predictable cash flow. Despite some subscriber churn, Sirius XM has maintained stable average revenue per user and even slightly increased its gross profit and EBITDA margins. Sirius XM also holds a virtual monopoly in the satellite radio market in North America, giving it significant pricing power.
Buffett’s stake in Sirius XM
The company has been investing in new strategies to attract customers, such as acquiring popular podcasts hosted by celebrities and influencers. Buffett is known for his contrarian approach, often finding value where others see a falling knife.
Sirius XM is set to undergo a reverse stock split on September 9 as part of its pending merger with Liberty SiriusXM Group. While reverse splits are often viewed negatively, Buffett’s investment could be highlighting an undervalued, financially stable company with future growth opportunities. The merger announcement in December 2023 caused Sirius XM’s price-to-earnings ratio to plummet, reflecting investor skepticism.
However, the company currently has a forward P/E of just 10.1, compared to 22.4 for the S&P 500. Investors looking for a potentially underpriced opportunity in a company with strong cash flow might consider following Buffett’s lead and investing in Sirius XM, especially before the reverse split occurs next month.
