One of the most closely followed investors in the world is Berkshire Hathaway CEO Warren Buffett. Known as the Oracle of Omaha, the esteemed investor has built a billion-dollar fortune owning high-quality businesses and normally holding his positions for long periods of time.
Some of Buffett's most notable investments include Coca-Cola, Apple, and American Express. Not only are these companies some of the most recognized brands globally, but they all have amassed seriously loyal consumer followings.
Berkshire Hathaway's latest 13F filing revealed an intriguing move by Buffett last quarter. Below, I'll dig into one of his bigger buys and assess if now is a good opportunity to follow his lead.
Buffett's big move
According to regulatory filings with the Securities and Exchange Commission (SEC), Berkshire increased its stake in satellite radio company SiriusXM(NASDAQ: SIRI) by 30,559,834 shares. Prior to this, Berkshire held approximately 10 million shares in the audio company. Why is Buffett so attracted to SiriusXM that he made such a massive purchase?
Image source: The Motley Fool
SiriusXM has a lot to offer
Buffett's investment philosophy is surprisingly simple. Most of Berkshire's portfolio is invested in blue-chip companies that generate steady, predictable growth and have established themselves as leading brands in their respective markets.
SiriusXM is a poster child for these investment features. The company is the largest satellite-radio provider in North America. Moreover, unlike traditional terrestrial radio, SiriusXM derives the majority of its revenue from subscriptions.
Given its market-leading brand equity, SiriusXM has a lot of leverage when it comes to pricing power. While advertising isn't the company's core sales component, brands are still eager to get in front of SiriusXM's 34 million subscribers.
The combination of recurring subscription revenue and advertising dollars flowing through the front door should make for an enticing business, right? Well, I wouldn't rush into SiriusXM stock just yet.
Don't overlook the risks
Although 34 million subscribers is a lot, investors should be aware that SiriusXM has a churn and retention problem. The company's subscriber base has been steadily declining and is currently lower than pre-pandemic levels.
This isn't surprising. The pandemic gave way to an entirely new shift in the corporate environment -- namely, remote work. Since fewer people are driving to and from work every day, it's reasonable to think some subscribers canceled their memberships to SiriusXM as usage went dormant.
Moreover, macroeconomic factors, including lingering inflation and high interest rates, are also causing consumers to scale back on discretionary spending. Subscription services are one of the easiest and most obvious areas to trim when you're trying to stretch a budget.
Not only has this impacted the company's biggest source of revenue, but customer attrition has led to a decline in profits for SiriusXM. The combination of falling sales and profits doesn't make investors feel confident.
Furthermore, over the last couple of years, SiriusXM has doled out large sums to acquire exclusive rights to podcasts to entice consumer engagement. I find this strategy confusing and somewhat irresponsible, considering Spotify effectively failed at the same game.
SiriusXM recently traded at a forward price-to-earnings (P/E) multiple of 12.5. While this is handily lower than the P/E of the S&P 500, I find the discount warranted.
There's an argument to be made that SiriusXM is a value-stock opportunity. However, with an unproven roadmap to reignite growth, coupled with macro themes disrupting the business, I don't think that SiriusXM is on its way to cruising.
While I understand Buffett's preference to invest in well-known brands and steady growth, SiriusXM is too risky for now. As a customer myself, I'm happy to continue paying for the service. But as an investor, I'll look for value elsewhere.
Should you invest $1,000 in Sirius XM right now?
Before you buy stock in Sirius XM, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Sirius XM wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of March 18, 2024
American Express is an advertising partner of The Ascent, a Motley Fool company. Adam Spatacco has positions in Apple. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, and Spotify Technology. The Motley Fool has a disclosure policy.
