Audio entertainment company Sirius XM (SIRI) is shifting gears strategically and setting itself up for significant growth potential. Its unique position as a near-monopoly in satellite radio and its pivot towards exclusive content and streaming, coupled with recent strategic moves – including a recent split off and merger with Liberty Sirius XM and significant backing from Warren Buffett’s Berkshire Hathaway, paints a compelling picture for potential investors.
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Despite facing challenges such as high debt and competitive pressures, the company is a cash printing machine, with management targeting $1 billion in free cash flow for 2024. With these recent developments, SIRI has emerged as a captivating contrarian investment opportunity.
Sirius XM Selected by the Oracle of Omaha
Sirius XM is an audio entertainment company that manages a diverse range of businesses, including SiriusXM subscription service, Pandora’s ad-supported and premium music streaming services, an extensive podcast network, and a multitude of business and advertising solutions. It is estimated to have approximately 150 million listeners every month, for whom it provides a variety of live, on-demand, and curated programming across music, talk, news, and sports.
In recent corporate developments, Liberty Media finalized the split-off of its wholly owned subsidiary, Liberty Sirius XM Holdings Inc., via a share redemption strategy. The subsidiary was then integrated with Sirius XM Holdings Inc. This chain of events, including the split-off and the merger, has led to Sirius XM Holdings Inc. emerging as an independent, publicly traded company as of September 10, 2024.
Concurrent with the merger, it was disclosed that Warren Buffett’s Berkshire Hathaway had significantly increased its investment in Sirius XM Holdings by 262.24% as of the quarter end. Despite the ongoing question of satellite radio’s viability in today’s landscape, Buffettologists suspect Berkshire is drawn to the company’s moat-like characteristics, such as a substantial market share and ability to secure exclusive content deals with major sports leagues, as well as its ability to generate significant cash flow.
Sirius XM’s Financial Outlook
Most recently, SIRI’s management has issued financial guidance for 2024, forecasting total revenue to reach approximately $8.75 billion, adjusted EBITDA of roughly $2.7 billion, and a free cash flow of about $1.0 billion.
Further anticipated amendments in its free cash flow guidance are likely due to transaction impacts, which SiriusXM estimates to be about $200 million. This accounts for transaction costs, incremental interest expenditure connected to the assumed and subsequently incurred debt tied to the Liberty Media transaction, and finally, cash outflows at Liberty Sirius XM Holdings Inc. before the transaction was finalized. Around $70 million is anticipated to be tied to closing costs and forward incremental interest, while about $130 million is related to cash outflows at Liberty Sirius XM Holdings Inc. before closing.
Is SIRI a Buy?
Wall Street continues to digest the split-off merger results, though analysts’ early response has been mixed. For instance, Wells Fargo analyst Steven Cahall maintained an Underweight rating while reducing the price target on the shares from $25 to $23. On the other hand, Evercore ISI analyst Vijay Jayant kept a Hold rating and increased the price target to $32.50. Finally, Seaport Global’s David Joyce rated Sirius XM a Buy with a $37 price target, noting the new structure will enhance trading liquidity and simplify the story, which may broaden the shareholder base and improve sentiment and valuation.
Based on cumulative analyst recommendations and price targets, Sirius XM Holdings is rated a Hold. However, the situation is fluid, with many analyst updates anticipated, so a change to this rating is highly likely.
SIRI in Summary
The financial landscape for Sirius XM is intriguing. Despite challenges and mixed predictions, the remarkable performance goals set by the management team, backing from notable investors such as Berkshire Hathaway, and the promising prospects of its listener base and exclusive content could make SIRI an appealing prospect for investors who appreciate a contrarian play.
