Warren Buffett has been a massive net seller of stocks this year, drawing over $90 billion out of Berkshire Hathaway’s investment portfolio and back into its cash reserves in the first half of the year alone.
One stock Buffett is buying, however, is radio internet company Sirius XM (NASDAQ:SIRI). Why is Warren Buffett buying Sirius XM, and is the stock a value buy at today’s prices?
How Much Sirius XM Does Buffett Own?
Berkshire Hathaway currently owns about 110 million shares of Sirius XM valued at a little over $3 billion. Though this amounts to just 1% of the total Berkshire portfolio, It accounts for more than 30% of Sirius XM’s total value.
It’s not yet clear whether Buffett is done buying the stock or if additional purchases are on the horizon and Buffett plans to own the firm outright.
Sirius Has a Really Wide Moat, a Virtual Monopoly
Buffett famously looks for enterprises with durable, long-term competitive advantages, colloquially known as moats.
In the case of Sirius XM, it’s not difficult to understand why the company appeals to Buffett. The company controls about 60% of the internet radio broadcasting market, making it by far the leader within its main industry.
Sirius XM also has standing partnerships with several automotive manufacturers, cementing its place as the default internet radio provider for automobiles.
Recently, Toyota and Lexus entered into an agreement with the company that allows dealers to include a 3-year extended subscription with new vehicle purchases. By tying itself directly to the automotive market, Sirius XM may be able to retain its advantage as other radio providers struggle.
Was Sirius Simply An Arbitrage Play?
To some extent, it’s likely that Buffett has been looking at Sirius XM as an arbitrage play due to a recent merger the stock underwent. In September, ordinary shares of SIRI merged with tracking shares held by Liberty Media, creating a single, unified stock around Sirius XM.
Ahead of the merger, Buffett had acquired over $2 billion worth of the tracking shares. These shares traded at a discount to the value of ordinary SIRI shares, creating a significant opportunity for Buffett once the merger had taken place.
Indeed, Berkshire began selling its now more valuable shares of Sirius XM almost immediately after the shares were unified.
On September 9th, the company sold about 2.8 million shares, a move that was likely designed to take some profits off the table after the merger. It’s worth noting that this was the same day on which the merger was formally completed.
While Buffett is a proponent of buying and holding, such merger arbitrage deals have also played a major role in his investing career. Buffett laid out his approach to these deals in Berkshire’s 1988 shareholder letter and has dabbled in them occasionally since.
Generally, Buffett will take on a merger arbitrage position when the discrepancy between share valuations is large enough to outperform treasury yields, the likelihood of the merger going through is high and the risk of money being tied up for too long is minimal.
What About Sirius XM’s Valuation?
While Sirius may have had an element of an arbitrage opportunity in Buffett’s mind, he has continued to buy shares after the Liberty Media merger.
In the second week of October, Berkshire began buying shares again, even though it had sold them only a month earlier. This suggests that Berkshire’s investment team may still see additional value in the stock.
Looking at Sirius’ valuation, it’s not difficult to see why this might be the case. Trading at just 7.2x earnings and 5.7x cash flow, SIRI shares give substantial indications of being undervalued.
This view is further boosted by the stock’s 0.54 price-to-earnings-growth ratio, suggesting that the stock may also be undervalued based on its future earnings prospects.
Why Did Warren Buffett Invest In Sirius XM?
Warren Buffett’s Berkshire Hathaway most likely invested in Sirius XM because it appears substantially undervalued, trading at just 7.2x earnings and 1.1x LTM sales.
On a discounted cash flow basis, it appears to have upside of 53% to fair value of $42 per share.
Is Sirius XM A Value Trap?
While one doesn’t typically worry about value traps where Warren Buffett is investing, it’s worth asking whether Sirius XM could be one. After all, Buffett’s last major foray into media was the ill-fated Paramount investment that was sold off earlier this year. Though Berkshire never disclosed an exact amount, Buffett admitted at this year’s shareholder meeting that the position had cost the company a large amount of money.
In the case of Sirius XM, there are a couple of factors that may raise concerns for investors. Chief among these is the company’s gradually declining subscriber count. The number of Sirius XM subscribers peaked in Q1 of 2019 at 34.9 million. Since then, the number has slowly drifted downward to 33.2 million as of the end of Q2 of this year. Though far from disastrous, this slow loss of subscribers does suggest that the company has lost its growth momentum and may be failing to attract younger customers.
Somewhat unsurprisingly, this has also caused the company’s revenues to stagnate. Quarterly revenues have essentially been locked in place since Q3 of 2022. Though Sirius hasn’t lost much ground in this area, it also hasn’t gained any.
Earnings per share have followed a similar trend, stabilizing within a range of about $3 to $3.50 in any given 12-month period.
It’s worth noting that the stock is currently priced at enough of a discount that Sirius XM doesn’t need to produce much growth to justify its valuation. Furthermore, the company is kicking off a very respectable dividend that allows it to return a substantial portion of its earnings to shareholders. SIRI shares currently yield about 3.8 percent, more than triple the current average of the S&P 500.
All things considered, it seems probable that Sirius XM is not a value trap. The company may not be growing much, but its competitive advantages and large slate of radio programming will likely keep it from losing too much ground.
With such low pricing and a healthy dividend to bolster returns, it doesn’t seem that Buffett has walked into a value trap with SIRI.
With that said, the deal Buffett got by buying discounted tracking shares that later were merged into Sirius XM’s stock base allowed him to get a very favorable cost basis. Though SIRI shares don’t appear overvalued today and may even still be undervalued, investors buying in after the merger likely won’t be able to get the deal that Berkshire did by taking advantage of the merger arbitrage opportunity.
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