Today, I will be analyzing my largest stock holding Sirius XM. I think the stock is very attractive at current prices for value investors with a contrarian mindset.
The new Sirius XM was “split off” from its former parent Liberty Sirius XM Holdings, Inc. in September 2024. The company “split off” the “new” Sirius XM in order to simplify its capital structure and unlock value for shareholders. Sirius reported a one-time, non-cash $3.5 billion impairment charge related to the split-off. This charge has nothing to do with the normalized, long-term earning potential of Sirius XM and I think Sirius XM’s true value is being overshadowed by the recent split-off. Berkshire Hathaway currently owns 35.4% of the stock and John Malone owns about 6.6%.
The Consensus View on Wall Street
The consensus view among analysts seems to be that Sirius XM is a “melting ice cube” and a value trap, given the slowdown in subscriber growth. The Street seems to think that competitors such as Spotify and Apple Music will eat Sirius XM’s lunch and continue to take market share. That may be true (and the competitive threats coupled with the impairment charge previously mentioned likely explains why Sirius XM’s stock is trading near 5-year lows), however, I disagree with the narrative that Sirius XM’s business is in a permanent, secular decline. If you really dig into Sirius XM’s numbers, they tell a different story.
Sirius XM’s Market Share
Sirius XM is estimated to hold a 60% market share in the satellite radio market. For some perspective, there are currently 167 million vehicles in operation with Sirius XM radios, per the company’s most recent 10K filing. There are estimated to be about 332 million vehicles registered in the United States and Canada, which are Sirius XM’s primary markets. This means that Sirius XM’s radios are in roughly 50% of all cars registered in the United States and Canada. Per Sirius XM’s 10K, “satellite radios are available as a factory-installed feature in substantially all vehicle makes sold in the United States.” Considering Sirius XM is the only satellite radio provider in the U.S.; I would argue that the company does have an economic moat.
Sirius XM’s ARPU and Churn Rates
There seems to be a disconnect between Sirius XM’s depressed stock valuation and the solid subscriber metrics the company has reported recently.
Sirius XM owns Pandora and so as you can see from the chart above, Sirius XM is holding market share (at 23%) vs. competitors such as Spotify, YouTube, and Apple Music. Sure, competitors are likely to continue to gain some market share, but I do not believe that Sirius XM is in danger of rapidly losing subscribers. For instance, in Q2 2024, Sirius XM’s average revenue per user (ARPU) was nearly 3x as high as Spotify’s and churn was 60% less than Spotify’s.
I am not arguing that music streaming services such as Spotify and Apple Music are not competitive threats to Sirius XM’s business. Rather, I think Sirius XM’s low churn numbers show that customers really enjoy Sirius XM’s content offerings and will continue to use Sirius XM.
It is interesting to look at the self-pay monthly churn numbers (as shown below). A self-paying customer is one that converts to a monthly subscription after the free trial period and the subscription is not paid for by a third party such as an automaker.
Sirius XM primarily caters to the car and many people listen on their commute to work. At a time when many Americans were working remotely during the Covid pandemic and driving less, I would have expected monthly churn rates to increase but the churn actually decreased from 1.8% in Q1 2020 to 1.5% in Q4 2024. These low churn numbers suggest that Sirius XM may have a stickier customer base than many investors believe.
Valuation
The key number when assessing a company’s true “earning power” is “owner earnings.” Warren Buffett detailed how to calculate this number in the 1986 Berkshire letter…
“we can gain some insights about what may be called "owner earnings." These represent (a) reported earnings plus (b) depreciation, depletion, amortization, and certain other non-cash charges such as Company N's items (1) and (4) less (c) the average annual amount of capitalized expenditures for plant and equipment, etc.”
Bruce Greenwald is a leading authority on value investing and a distinguished professor from Buffett’s alma mater, Columbia Business School. In Value Investing: from Graham to Buffett and Beyond, Greenwald describes “earning power value.” Earning power value is a conservative valuation metric that capitalizes adjusted “true earnings” of an enterprise and doesn’t speculate on future growth, which can be hard to accurately project. I believe an analyst calculating Greenwald’s earning power value and Buffett’s “owner earnings” should come up with a similar number. Over a normalized earnings cycle, this “owner earnings” and “earning power value” should roughly be in line with a company’s sustainable “free cash flow”. This won’t always be the case but sometimes it will. I believe an analyst using conservative assumptions is more likely to come up with an accurate valuation for an enterprise, especially if the company has consistent previous operating results.
To come up with an approximate intrinsic value for Sirius XM’s shares, I used Greenwald’s earning power value formula to come up with adjusted earnings. First, I multiplied Sirius XM’s 2024 revenue by average EBIT margins for the last 5 years to come up with normalized operating income (also known as EBIT). I then assumed an average effective tax rate of 25%. For context, Sirius XM’s effective tax rate in 2023 was roughly 18% and in 2022 was about 24% so I used a 25% rate to be conservative. Sirius XM’s average depreciation and amortization over the last five years was roughly $627 million. Greenwald’s earning power value is very conservative, and the calculation assumes you add back only half of the after-tax depreciation and amortization charges to after tax EBIT. ($627 million x 75% x 50% = $235 million). Add back $235 million to after tax EBIT of $1.435 billion to get the normalized profit of roughly $1.67 billion. I then deducted Sirius XM’s average maintenance capital expenditures of roughly $500 million (less 2% income growth assumptions) to get a “normalized earnings” figure of about $1.172 billion. I estimated Sirius XM’s weighted average cost of capital (WACC) to be 5.73%. I made the conservative assumption that free cash flow growth would be roughly 2% annually. Management is targeting long-term free cash flow of $1.8 billion, which would represent 50% growth from 2023 free cash flow of $1.2 billion. If management can achieve these targets in 5 years, that would represent roughly 8.4% annualized free cash flow growth from 2023 through 2028. To get the capitalization rate (which is WACC – growth rate), subtract 2% from 5.73% to get 3.73%. I then divided the “adjusted earnings” figure of $1.172 billion by 3.73% to get an enterprise value of $31.433 billion. Subtracting net debt yields an implied equity value of $21.2 billion, or $62.78 per share. I don’t think this is stretch in valuation given Sirius XM stock traded in the low to mid 60’s for much of 2022.
Sirius XM is guiding for $1.150 billion in free cash flow for 2025, so as you can see this “adjusted earnings” figure of $1.172 billion is roughly in line with Sirius XM’s “free cash flow.” For some historical context, Sirius XM’s average annual free cash flow over the last 10 years was about $1.44 billion. Management is targeting long-term free cash flow of $1.8 billion, which would represent 50% growth from 2023 free cash flow of $1.2 billion.
Satellite Capex Set to Decline
Sirius XM should see a reduction in satellite capex of roughly $300 million over the next 3 years, according to the company’s Q3 earnings report. This should pave the way for the company to get to $1.5 - $1.8 billion in free cash flow by 2028.
Takeaway
Sirius XM currently pays 5.4% dividend that I think is sustainable and likely to grow over time. (payout ratio = ~36% of 2024 free cash flow). The annual dividend has grown by about 34% annually over the last 8 years. Moreover, the company has a history of share buybacks and should continue repurchasing shares (which would add substantial value at the currently depressed prices which are currently trading at roughly 61% of book value) and repaying debt. At a current free cash flow yield of roughly 15%, I believe Sirius XM offers a compelling bargain for value investors at current levels. Berkshire Hathaway also owns more than a third of the company, which makes sense given the company’s large discount to private market value. I think Sirius XM is probably worth at least $60 per share based on conservative valuation metrics, which would imply about 215% upside from current levels. Sure, there are risks of Trump’s proposed tariffs affecting new and used car sales, which is Sirius’s primary customer acquisition strategy. However, tariffs will affect just about everything in the economy, and I view the current economic fears as an opportunity to buy good businesses like Sirius XM that are on sale.
Full Disclosure: I own Sirius XM shares, and the stock currently represents about 28% of my portfolio.