Did Warren Buffett Make a Mistake This Month?

There were more eyes than usual on Sirius XM Holdings (SIRI -3.10%) this week in anticipation of the satellite radio operator posting third-quarter results on Oct. 31. With Warren Buffett’s Berkshire Hathaway (BRK.A) (BRK.B -0.10%) adding to his substantial stake earlier this month, investors were circling Thursday morning’s financial update to see if the legendary investor saw something that the rest of the market was missing.

With Sirius XM shares cut in half in 2024, the former battleground stock isn’t giving up much of a fight this year. The country’s lone satellite radio platform could’ve turned sentiment around with a blowout performance, but it was a dud at first glance. But that doesn’t mean that Buffett made a mistake.

Rock you like a hurricane

Paying a premium for satellite radio isn’t much of a priority for drivers these days. They have access to a growing number of streaming apps that they can seamlessly play through their connected cars and trucks. This isn’t new. This will be the tenth consecutive year that Sirius XM fails to deliver organic double-digit revenue growth.

The problem is that decelerating revenue and subscriber growth have shifted into reverse. Sirius XM is going the wrong way, and its earnings report on Halloween appears to be more trick than treat.

Revenue for the three months ending in September declined 4% to $2.17 billion, its largest year-over-year decline in its 30 years of public trading. Declining subscribers have been the norm after the platform’s popularity potentially peaked last year. Sirius XM now has less than 33.2 million total subscribers, 2% fewer than it was reaching a year ago.

Sirius XM has managed to grow its operating efficiency during the lull to keep its bottom line bustling, but it’s a challenge to its scalable model when its audience and even its ad revenue is backpedaling. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) declined 7% for the quarter, outpacing the 4% top-line slide.

Reported earnings clocked in with a massive loss of $2.96 billion, but fans of Sirius XM’s historically juicy profitability don’t need to panic. The red ink is entirely the handiwork of the conversion of Liberty Sirius XM Group tracking shares to Sirius XM’s common stock. The transaction last month has been a near-term burden on the shares, but will be beneficial in the future. Sirius XM’s healthy profitability should continue beyond this one-time hit.

Image source: Getty Images.

Riding the storm out

Berkshire Hathaway owned both the common and tracking shares for years. It was encouraging to see Buffett’s company increase his position earlier this month. He now owns 32% of the total shares outstanding. It’s a commitment that will difficult for Buffett to unwind, but that’s also why it was so significant that he added to his position after the tracking shares conversion and reverse split were completed.

Sirius XM seems to agree. It doesn’t seem concerned about its historically healthy ability to generate cash. It increased its dividend last week, something that it has done since it started paying out quarterly distributions eight years ago. The stock now yields nearly 4%.

The media stock did lower its revenue and free cash flow guidance, something that it has rarely done during the year. Sirius XM now expects to end 2024 with $8.675 billion on the top line and generate $1 billion in free cash flow. Three months ago, it was eyeing $8.75 billion in revenue and $1.2 billion in free cash flow. Its adjusted EBITDA projection remains steady at $2.7 billion for all of 2024.

Investors will want to keep an eye on the downward revisions, but Buffett still appears to have a bargain here. Back out the one-time earnings hit, and Sirius XM continues to trade for less than 10 times earnings. Analysts — before Thursday’s financial update, at least — expect a return to revenue and earnings growth in 2025.

Sirius XM is unlikely to return to double-digit revenue growth anytime soon, but the platform should continue to be a moneymaker. Lower interest rates, a return to in-office work, and a soft landing for the economy should result in decent growth in car sales next year, the lifeblood of new subscriptions for Sirius XM.

Buffett may have been early to the stock in this turnaround story, but he’s not a short-term investor. You’ll have to wait years — not months — to decide if he made a mistake. For now, the sky isn’t falling for the satellite radio operator.