Investigating potential blunders in Warren Buffett's recent actions.
This week, eyes were on Sirius XM Holdings (SIRI 0.36%) as investors waited for the satellite radio operator to release its third-quarter results on October 31. With Warren Buffett's Berkshire Hathaway (BRK.A 0.49%) (BRK.B 0.28%) significantly increasing its stake in Sirius XM earlier this month, enthusiasm buzzed around the upcoming financial update.
Even with a 50% drop in Sirius XM shares in 2024, the battleground stock didn't put up much of a fight in 2023. The single satellite radio platform missed an opportunity to shift sentiment with an impressive quarter, but that doesn't mean Buffett's not onto something.
Weathering the tempest
Paying for satellite radio isn't high on drivers' priority lists these days, with a plethora of streaming apps vying for attention through connected cars. This trend isn't new, and Sirius XM has failed to deliver double-digit organic revenue growth for ten straight years.
The issues run deeper. Revenue and subscriber growth have taken a nosedive, and Sirius XM's performance in Q3 didn't help. Revenue dipped 4% to $2.17 billion, its biggest year-over-year decline in 30 years of public trading. The subscriber count also took a hit, with 2% fewer subscribers than at the same time last year, leaving the platform with just over 33.2 million total subscribers.
Despite the struggles, Sirius XM has managed to keep its bottom line afloat by improving operational efficiency. But with audience and ad revenue trending downward, the scalable model is under strain. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) slipped 7% during the quarter, partly due to a one-time hit related to the conversion of Liberty Sirius XM Group tracking shares to Sirius XM's common stock.
But fear not, despite the massive reported loss of $2.96 billion due to this conversion, Sirius XM's profitability should remain intact past this short-term setback. The stock now yields a generous 4%, thanks to a recent dividend increase. Sirius XM has boosted its dividend for eight straight years, an impressive feat in today's market.
Riding the waves
Buffett's continued investment in Sirius XM shouldn't come as a surprise. He's owned both common and tracking shares for years, and his latest purchase indicates a belief that the growth potential is still there. The high dividend yield coupled with the recent price drop may have made the stock an appealing option for Berkshire Hathaway.
To cover its bases, Sirius XM also updated its financial projections in response to the third-quarter results. Revenue and free cash flow guidance were revised, but the adjusted EBITDA forecast remains steady at $2.7 billion for all of 2024.
The new revenue projection is set at $8.675 billion, down from $8.75 billion earlier, while free cash flow is now projected to reach $1 billion, up from the previous estimate of $1 billion. Analysts predict that 2025 could see a return to growth both in revenue and earnings, which could float the stock price higher.
Outlook
The satellite radio operator faces challenges, but there's potential growth on the horizon. Lower interest rates, a return to in-office work, and a soft landing for the economy should stimulate auto sales in 2024, fueling new subscriber growth.
It may take time to see if Buffett made a solid bet on Sirius XM. But the outlook for the stock remains promising, with robust insider buying trends and a compelling dividend yield. Buffett's stake may not be a gamble after all, but a long-term play with potentially lucrative returns.
Despite the financial struggles and dwindling subscriber base, individual investors might find interest in Sirius XM due to its attractive dividend yield, given the recent decrease in share price. In light of this, strategic investments in finance and further exploration of revenue streams could potentially boost the company's financial position and overall performance.
Buffet's persistence in investing in Sirius XM, despite recent setbacks, underscores the belief in the long-term growth potential of the company. By exploring innovative finance strategies and leveraging the current market conditions, Sirius XM could potentially revitalize its investing approach and deliver positive returns for investors.
