Buffet's 2024 Stock Suffers a 54% Decline. Is It Wise to Purchase at a Discount?
For about 59 years, Warren Buffett has been in charge at Berkshire Hathaway, purchasing the holding company at $14.86 per share in 1965. The A-class shares, which have never been split, are now being traded for over $700,000, making Buffett one of the best stock pickers of the past six decades, despite his recent trend of selling more than buying.
One stock Buffett has been actively accumulating is American Satellite Radio Provider, Sirius XM Holdings (SIRI -12.25%). By the end of September, Buffett owned over 105 million shares, worth about $2.5 billion.
Regrettably, Sirius XM stock has been performing poorly recently, falling by 54% from the end of 2023 through Nov. 19, 2024.
Investing in undervalued high-quality stocks is a significant part of Buffett's successful investment strategy. Let's examine why the stock has been struggling to determine if it's a wise investment at its current price.
Reasons for Sirius XM stock's fall in 2024
It's not rocket science to recognize that Sirius XM is facing challenges. After seeing a significant increase in quarterly revenue for several years, revenue peaked in late 2021 and has been stagnant or declining since.
The company acquired Pandora in 2019, but relies on Sirius XM subscribers for over 70% of its total revenue. The stock's drop this year can be attributed to the unreliability of subscription revenue. In the third quarter, subscriber revenue from the Sirius XM segment fell 5% year over year to $1.5 billion.
Sirius XM reported ending September with 33.2 million subscribers, a decrease of about 800,000 from the end of 2021.
The mobile internet infrastructure in North America has improved significantly in just a few years. The number of people who can stream audio on their car's touchscreen using the Spotify (SPOT -2.27%) app is much higher compared to a few years ago. This could be a reason why Spotify seems to be outcompeting Sirius XM.
While Sirius XM was losing subscribers, Spotify was gaining them rapidly. The audio streaming platform reported a 18.6% year-over-year increase in third-quarter U.S. revenue, surpassing the amount generated by the Sirius XM segment from its subscribers.
Why Buffett is a fan of Sirius XM stock
If you want to use the satellite radio feature in your car, Sirius XM is your sole option. The company makes some money from advertising, but a large chunk of its revenue comes from reliable subscriptions to Pandora and Sirius XM.
In addition to having a monopoly in the satellite radio market, Sirius XM boasts another feature that appeals to Buffett: high profit margins.
Although quarterly revenue has decreased, the need for customer service representatives has decreased proportionately for a stagnating user base. The well-managed company's operating margin over the previous 12 months rose to 23.8%.
Berkshire Hathaway does not pay a dividend, but Buffett appreciates businesses that do. Sirius XM has been increasing its dividend by 22.9% since mid-2022. The stock offers a yield of 4.3% at its current price.
Is it a smart buy now?
At a face value of 7.95 times trailing 12-month earnings, Sirius XM stock seems like a fantastic bargain. This low multiple offers investors a significant potential gain if profits continue to stay steady over the long term.
However, the profits available for distribution to investors have been on a downward trend. Management expects free cash flow to decrease from $1.2 billion in 2023 to around $1 billion this year.
Although free cash flow is sufficient to support the company's dividend, it has been declining since early 2022. Argue with Buffett as much as you want, but I'm not convinced purchasing Sirius XM stock is the best option at the moment.
Despite the challenges faced by Sirius XM, such as stagnant revenue and competition from streaming apps like Spotify, Warren Buffett continues to invest heavily in the company due to its monopoly in the satellite radio market and high profit margins. In fact, Berkshire Hathaway currently owns over 105 million shares of Sirius XM, worth about $2.5 billion. However, some analysts may argue against purchasing Sirius XM stock at its current price, as the company's profits have been on a downward trend and the free cash flow has been declining since early 2022. In terms of finance and investing, Buffett believes in purchasing undervalued high-quality stocks, but the decision to buy or sell Sirius XM shares ultimately depends on individual investment strategies and risk tolerance.
