Shares of Sirius XM Holdings (SIRI -1.32%) kicked off the new trading week by hitting a three-month high. It would go on to give back most of its recent gains on Tuesday after offering up problematic guidance for 2025. The satellite radio provider's stock would go on to tumble 12% on the news. Sirius XM has now surrendered more than half of its value in 2024, even accounting for its generous dividend distributions.
Not all investors have lost faith in Sirius XM despite this year's downpour of stock ticks. Warren Bufett's Berkshire Hathaway (BRK.A -0.39%) (BRK.B -0.56%) boosted its position two months ago. It remains to be seen if Buffett and his team have lost heart in the media giant since the mixed third quarter and uninspiring guidance initiation for 2025.
However, what seems like a knock in this auto-dependent company's engine may actually be opportunity at the door. Let's take a closer look.
Facing the music with fresh ears
The new outlook is rough, but not entirely shocking given its recent performance. Sirius XM is targeting $8.5 billion in revenue for all of next year, down 2% from the $8.675 billion it expects to deliver on the top line in 2024. Making matters worse, it hosed down its 2024 revenue guidance on Halloween, making this the second time in the last 45 days that it puts out a disappointing financial forecast. Wall Street's consensus was eyeing a modest return to revenue growth next year.
Zoom out: Revenue declined 0.6% last year. Its 2024 projection translates to a 3.1% slide this year. It's now bracing investors for another 2% step down come 2025.
Three years of declining revenue is not pretty, but did you catch how the degree of the top-line decline is easing between this year and next? Sirius XM is a highly profitable company that is using its money to buy back shares, pay a generous quarterly dividend, and reduce its debt load. Time is on its side.
Yes, a scalable model with high fixed overhead and low variable expenses like this will suffer as revenue and subscriber counts decline. The $2.6 billion in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) it's now expecting in 2025 is less than the $2.7 billion it's modeling for this year and the $2.8 billion it served up in 2023. The $1.15 billion in free cash flow that Sirius XM sees is well shy of the record $1.55 billion it generated back in 2022.
It's still generating 10-figure free cash flow. Sirius XM expects to improve its free cash flow conversion next year. It's not going away. It just needs to discover where the volume knob went.
Image source: Getty Images.
Step in during the fade out
Sirius XM isn't perfect. Stocks don't break in half in a soundproof chamber. It's quite possible that even a generational investor like Buffett got this wrong. However, with Sirius XM stock at its current level, it's at least worth some tire kicking.
The 33.2 million subscribers that Sirius XM is still serving are generally happy with the product. The audience keeps shrinking, but its monthly churn rate is in line with where the defection rate has been in the past. The problem here is all about getting new subscribers to try the platform.
A ho-hum market for new auto sales and the growing popularity of streaming apps that can seamlessly play in connected cars are strong headwinds. However, neither scenario is written in permanent ink.
Car sales can pick up now that auto loan rates are heading lower and companies are requiring employees to return to the office. There are still holes in the Sirius XM funnel of new users, but I really like its new partnership with Tesla to make the streaming version of its satellite radio platform finally available as a dashboard app for its most popular vehicles this month.
Sirius XM isn't turning the corner. This isn't a turnaround play. This is an opportunity to cash in on the market's potential realization that this isn't a runaway stock tumbling down a hill in neutral. There's brand loyalty.
There's a lot of money still trickling all the way down to the bottom line. It's a stock trading for 8 times forward earnings, even after analysts were scrambling with their downward revisions this week.
Sirius XM is committed to its dividend that now stands at a bountiful 4.3%. It sees another $200 million in incremental annual savings next year. The company is targeting another $700 million in debt reduction in 2025.
You can laugh at its goal of delivering $1.5 billion in free cash flow by 2027, given its recent check downs, but even bears have to believe that there's enough gas in this tank to make it to that punchline in three years. The stock has been brutal this year, but don't be surprised if this 2024 laggard is a leader in 2025.
