Could Sirius XM Shares Recover Following Their 12% Dive on Tuesday?
Sirius XM Holdings' (SIRI 0.81%) shares started the new trading week by touching a three-month high before experiencing a significant drop on Tuesday, following questionable forecasts for 2025. The satellite radio provider saw its stock fall by 12% as a result. In 2024, Sirius XM has already lost more than half its value, despite the generous dividend distributions it offers.
Despite this year's negative stock trends, not all investors have abandoned their trust in Sirius XM. Two months ago, Warren Buffett's Berkshire Hathaway (BRK.A -0.91%) (BRK.B -0.73%) increased its stake in the company. It remains to be seen if Buffett and his team have lost interest in the media giant, following the mixed third quarter results and the unenthusiastic 2025 forecasts.
What may appear as a setback for this automobile-dependent company might, in fact, be an opportunity emerging. Let's delve deeper.
Revisiting the Situation with a Fresh Perspective
The new outlook is challenging, but not entirely surprising given its recent performance. Sirius XM aims to generate $8.5 billion in revenue this coming year, representing a 2% decrease from the $8.675 billion it expects to achieve in 2024. The company faced criticism for revising its 2024 revenue guidance downward just before Halloween, making this the second time in the past 45 days that it issued disappointing financial projections. Wall Street anticipates a return to revenue growth in the upcoming year.
Step back: Revenue dropped by 0.6% in the previous year. The current 2024 projection corresponds to a decline of 3.1% this year. The company now forecasts another 2% decrease in revenue in 2025.
Three consecutive years of declining revenue may not be attractive, but consider the fact that the rate of decline is gradually decreasing between this year and next. Sirius XM is a highly profitable company, which uses its funds to purchase shares, pay out generous quarterly dividends, and reduce its debt. Time is on its side.
Yes, its scalable business model, characterized by high fixed expenses and low variable costs, will suffer with the decline in revenue and subscriber count. The $2.6 billion in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) that it now expects for 2025 is less than the $2.7 billion it projects for this year and the $2.8 billion it delivered in 2023. Despite this, the $1.15 billion in free cash flow that Sirius XM anticipates is significantly lower than the $1.55 billion it generated in 2022.
Despite its reduced cash flow, Sirius XM is still generating billions in free cash flow. The company expects to improve its cash flow conversion in the upcoming year. It's not going out of business. It just needs to discover where it misplaced the volume control.
Taking Advantage of the Situation
Sirius XM is not flawless. Stocks do not fail instantaneously in a soundproof chamber. It's possible that even a seasoned investor like Buffett made a mistake with Sirius XM. However, given the stock's current price, it's worth at least considering.
The 33.2 million subscribers that Sirius XM still serves continue to appreciate the service. The subscriber base remains steady, though its growth tempo has slowed down. The challenge here lies in attracting new users to the platform.
A dismal automobile market, combined with the growing usage of streaming apps that can be seamlessly integrated into connected cars, presents formidable obstacles. However, neither trend is etched in stone.
The market for new car sales could rebound as auto loan interest rates decrease and employees return to the office. There are still holes in Sirius XM's user acquisition funnel, but I have a soft spot for its new partnership with Tesla, which will make the satellite radio platform's streaming version available as an app for Tesla's most popular vehicles this month.
Sirius XM is not turning a corner. This is not a turnaround play. This is an opportunity to take advantage of the market's potential realization that this isn't a stock stubbornly plummeting on its own. There's brand loyalty.
There's still a substantial amount of money filtering down to the bottom line. It's a stock trading at 8 times its forward earnings, despite analysts slashing their estimates this week.
Sirius XM remains committed to its dividend, now at 4.3%. It anticipates an additional $200 million in annual cost savings next year. The company is targeting another $700 million in debt reduction in 2025.
Some may scoff at its goal of generating $1.5 billion in free cash flow by 2027, but even skeptics need to accept that there's enough fuel to keep this vehicle running until that destination. The stock has endured a brutal year, but don't be surprised if this lagging 2024 stock becomes a leader in 2025.
In light of the company's recent financial struggles, some investors may view Sirius XM's current share price as an attractive opportunity for investing in finance. Despite the decline in revenue and subscriber count, Sirius XM continues to generate substantial free cash flow and remains committed to its dividend distribution.
Considering Warren Buffet's Berkshire Hathaway's recent increase in its stake in Sirius XM, even skeptics might view Sirius XM as a potential leader in the finance industry in 2025, despite its struggles in 2024.
