Buffet Cherishes Sirius XM, Yet Investors Overlook a Significant Peril in the Generous Dividend Equity
Buffet Cherishes Sirius XM, Yet Investors Overlook a Significant Peril in the Generous Dividend Equity
It's common knowledge that Warren Buffett has a soft spot for dividend-paying value stocks, often referring to them as buying dollar bills for 80 cents.
Now, it seems like the renowned investor has found a new favorite. Berkshire Hathaway (BRK.A -0.07%) (BRK.B 0.25%) has been on a purchasing spree of shares for SiriusXM Holdings (SIRI 0.78%), the satellite radio company.
Last week, Berkshire revealed that it purchased an additional 5 million shares of the stock, pushing its ownership up to 117.5 million shares, worth approximately $3.5 billion.
In many aspects, Sirius XM aligns with the profile of a typical Buffett stock. It boasts a kind of monopoly as the sole satellite radio provider. It falls under the media sector, a sector Buffett has shown a keen interest in, and it trades at an adjusted price-to-earnings ratio of around 8. Sirius XM also offers a substantial dividend, currently yielding 5.3%.
However, Sirius XM faces several challenges that have effectively stunted its growth potential. These include competition from digital platforms like Spotify and a reliance on car ownership and in-car usage. Sirius XM doesn't disclose in-vehicle usage as a percentage of its total, but it did mention in its annual report that a significant portion of its satellite radio service subscribers come from new and used car purchases in the US.
According to Edison Research, half of traditional radio listening happens in-car, so it's safe to assume that this percentage is similar for SiriusXM.
The second challenge could pose a significant vulnerability for the company in the coming years. This threat seems to be largely overlooked by both investors and the company itself.
The impending auto disruption
The automotive industry is currently undergoing a transformation due to the surge in electric vehicles, but that's not where the main risk for SiriusXM lies.
Autonomous vehicles (AVs) are quickly becoming a reality, and Tesla's introduction of its driverless Cybercab at an event in October demonstrated that AVs could be here sooner than anticipated.
While the market recognizes the competitive threat of the Cybercab to some extent, Uber isn't the only company at risk. SiriusXM also appears vulnerable. After all, the reason for SiriusXM's efforts to make its radios available in most new and used vehicles is clear: the car is the most prominent use case for its product, especially for drivers reliant on audio entertainment during their commute.
If AVs become mainstream, the current radio-consumption model may become obsolete. With drivers free to read, sleep, text, scroll social media, watch videos, or work on a computer, the in-car radio usage model is likely to crumble.
If SiriusXM can't grow in the existing landscape, the widespread adoption of AVs could seriously impact its current business model. This is a speculative scenario at the moment, but it's a threat that investors should take into consideration, given that it hasn't received significant attention yet. In fact, autonomous vehicles and self-driving cars are not mentioned as risks in SiriusXM's most recent 10-K report.
The implications for SiriusXM
SiriusXM is already grappling with growth issues. In the third quarter, revenue decreased by 5% to $1.6 billion, and it gained only 14,000 self-pay subscribers in the quarter, reflecting almost stagnant subscriber growth.
Sirius acquired Pandora a few years ago, but Pandora has also struggled with growth, reporting a decline of 76,000 self-pay subscribers in the recent quarter.
Since its spin-off from Liberty Media a few months ago, SiriusXM has focused on cost-cutting to boost profitability and free cash flow. However, its revenue growth may be a more pressing concern in the long term. Sirius has reported low-single-digit revenue growth since 2022, and overall revenue has declined since then.
The threat from AVs isn't immediate, but the technology is likely to disrupt the automotive industry eventually, whether that's in three, five, 10 years, or more.
If AVs gain traction, it's likely to be detrimental to SiriusXM. Investors following Buffett should keep this long-term threat in mind, as the market appears to be overlooking it at the moment. If the Cybercab or another AV becomes popular, SiriusXM could face challenges.
In light of Berkshire Hathaway's recent investment in SiriusXM, it's evident that the finance giant sees potential in the satellite radio company's future, despite its challenges. Considering SiriusXM's monopoly, aligned media sector, high dividend yield, and Buffett-like profile, investors might want to consider the long-term implications of emerging technologies, such as autonomous vehicles, on the company's revenue growth.