Investors can find good reasons to buy this stock, but they must also address some serious red flags.
One can arguably forgive investors for not knowing what to make of Sirius XM Holdings (SIRI -1.56%) stock. The satellite radio and streaming stock has struggled for years and recently initiated a 1-for-10 reverse stock split after completing its merger with Liberty Media. None of this has stopped its stock from falling nearly 60% over the last five years.
However, it has attracted interest from a notable investor, and it holds a legal monopoly in satellite radio and exclusivity deals with some popular podcasters. Are such attributes enough to keep the media stock vibrant, or should investors focus on its challenges and get out of Sirius XM?
Why investors might consider Sirius XM stock
Amid its stock price decline, the most obvious reason to buy the stock may be its valuation. Sirius XM now trades at a trailing P/E ratio of 8. This takes its earnings multiple to a multi-year low.
That may have led Warren Buffett’s team at Berkshire Hathaway to add more shares of Sirius XM stock in recent quarters. This is particularly notable because Buffett has been a net seller of stock over the last few quarters, particularly after selling over 389 million shares of Apple in Q2 alone.
A factor that may have drawn the attention of Buffett’s team is the dividend. At about $1.06 per share annually, its dividend yield is now about 4%, more than triple the S&P 500 average of 1.25%. Moreover, Sirius has raised its payout every year since 2017, making it attractive to income investors.
Additionally, investors should remember that Sirius XM is on track for $1.2 billion in free cash flow for the year. This is plenty to cover about $410 million in dividend costs and continued share repurchases.
The share buybacks are also notable, since the number of outstanding shares fell 23% over the last five years, with about half of that occurring following the merger in September. If that trend continues, the lower share supply could also help drive the price higher.
Reasons to avoid Sirius XM stock
However, Sirius XM continues to contend with a weak competitive advantage. Indeed, it holds a monopoly in satellite radio, but consumers can get streaming media from multiple sources. If one is not a fan of its signed talents, it renders the satellite radio monopoly essentially meaningless.
That lack of market power is reflected increasingly in its subscriber numbers. Although 33 million continue to subscribe, that number fell by about 100,000 in the second quarter of 2024. Moreover, new car sales, a major source of promotional subscriptions, have fallen in recent months, a factor blunting its subscriber growth potential. Also, the number of Pandora’s paid subscribers fell by 41,000 in the most recent quarter to about 6 million, an indication some of the same negative trends affect its streaming business.
Unfortunately for Sirius XM bulls, such trends are not new for the company. That may have prompted the merger with Liberty Media, the reverse stock split, and its much lower stock price.
Worse, a failure to reverse these moves may bode poorly for Buffett’s investment in Sirius XM. Investors may remember a recent investment loss for Buffett in Paramount Global, another slow-growing media stock he sold after it cut its dividend. If trends do not change, Sirius XM could turn into the same type of experience.
Should investors buy Sirius XM stock?
Sirius XM stock is a buy, but only for those with a high risk tolerance. Considering the company’s attributes and challenges, the stock is a bet on reviving subscriber growth. If that happens, investors will get a huge bargain, at just 8 times earnings, and benefit from a rising dividend.
Unfortunately, with a relatively weak competitive advantage, a recovery for Sirius XM is far from guaranteed. If subscriber declines force it to cut its dividend, it could mirror Paramount Global’s decline, leading to more pain for investors.
Will Healy has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.