Meet Sirius XM's new odd couple: Warren Buffett and John Mayer

By Michael Brush

Berkshire Hathaway and other Liberty Media shareholders are getting a 'free money' play on the satellite-radio company

Warren Buffett, the famed investor, and John Mayer, the popular songwriter and guitarist, would seem not to have much in common. But one thing they both share is a big bet on Sirius XM Holdings Inc. (SIRI), the satellite-radio company.

Buffett's interest comes via Berkshire Hathaway Inc.'s (BRK.A) (BRK.B) position in Liberty Media Corp.'s Series A (LSXMA) and Series C (LSXMK) tracking stocks for Sirius XM, which represent the value of a portion of Sirius XM's business. Berkshire Hathaway has dropped $267.2 million on the Liberty trackers so far this year, at an average price of $30.28.

Mayer, meanwhile, is investing his time in Sirius XM. He can sell out large venues whenever he wants, but he also curates a new Sirius XM channel that features his music and commentary, called "Life with John Mayer."

'Free money'

Buffett's approach has an intriguing twist. Later this year, various Liberty Media tracking stocks will be consolidated into Sirius XM shares. The conversion rate will be 8.4 Sirius XM shares for each Liberty share.

Some simple math suggests there's potential "free money" in the mix. The two Liberty share classes recently traded for about $29. Multiply the Sirius XM share price of $4.43 by the 8.4 share-conversion rate and you get $37.21. In short, owning the Liberty tracking stocks amounts to an $8-per-share gift as things now stand. The conversion is slated to happen by the end of August.

One tactic might be to buy Liberty Media shares, take the "free money" assuming the conversion gap holds, then exit the position. "The spread has to close at some point between now and the end of August," says Chris Marangi, co-chief investment officer of value investing at Gabelli Funds. But it also might be worth keeping the Sirius XM stock.

Of course, a risk is that the spread closes via declines in Sirius XM shares. It would still be tough to lose all the "free money." If you buy a Liberty tracking stock at $29, Sirius XM would have to fall to $3.45 ($29 divided by 8.4) from the recent Sirius stock price of $4.43 for you to lose all the potential share-conversion upside, notes FBN Securities analyst Robert Routh. He thinks such a decline is unlikely. In fact, he's more bullish on Sirius XM than consensus, and he makes a plausible case (more below).

Marangi looks at owning the Liberty tracking stocks as a way to get cheaper access to the Sirius XM business. Sirius XM trades at an enterprise value to Ebitda of around 9.0. That falls to 7.0 if you get access to Sirius XM shares via the Liberty tracking stocks, which Gabelli Funds owns. Berkshire Hathaway may be using the same logic.

Like Routh, Marangi is bullish on Sirius XM's prospects over a multiyear timeframe. Besides the free-money angle, Sirius XM has many of the qualities that Berkshire is known to appreciate - especially underappreciated growth and lots of cash flow.

Surprise growth ahead?

Sirius XM has challenges. Revenue slipped to $8.95 billion last year from $9 billion in 2022. The company's 34 million subscriber base was also down slightly. The future doesn't necessarily look much brighter. Sirius XM's guidance calls for another down year in sales in 2024, expected to come in at $8.75 billion. Morningstar analyst Ali Mogharabi projects 1% annual revenue growth for Sirius XM and its streaming platform Pandora over the next five years.

But Sirius XM might surprise investors. Routh sees the following avenues for growth, supporting his annual-sales-growth projection of 2.5%-3% over the next several years. "Although some may think Sirius XM doesn't have room to grow, we beg to differ," he says. Here are four drivers to consider:

1. Mayer might save the day: Sirius XM is trying to draw in younger listeners. "They have to change their lineup to do that and not look like your father's radio station," Routh says. This seems sensible, given that close to half of subscribers are over 45 years old and less than 20% are below 34, according to Similarweb.

Mayer has the marketing muscle to help get this done. His record shows he has star power that can boost the fortunes of a company when he collaborates. A few years ago, Mayer co-designed an electric guitar with Maryland-based guitar maker PRS Guitars called the Silver Sky. It became wildly popular and was ranked the top-selling guitar of 2023 by musical-instrument site Reverb.com, beating out products from well-known guitar brands Fender and Gibson.

Besides Mayer, Sirius XM has added channels featuring singer-songwriter Kelly Clarkson, and the SmartLess Media podcast with Will Arnett, Jason Bateman and Sean Hayes. "This is really the first time we're going to have significant content for a younger demographic," Sirius XM Chief Content Officer Scott Greenstein noted on its February earnings call, citing those talents as well as performers Carrie Underwood, will.i.am and Shaggy.

2. Sirius XM has potential beyond the car: In December, the company rolled out its new Sirius XM App, which improves access to content via smartphones and mobile devices. The app enhances search and content discovery and it is "yielding promising signs of improved engagement," CEO Jennifer Witz said on the February earnings call. "We see the recommendation engine performing well and exposing listeners to a greater breadth of content." Behind the scenes, the app supports marketing efforts and improves subscriber-account management. "Sirius XM should materially increase its share of the 'out-of-car' market due to the company's new app," Routh says.

3. New-car sales should rise this year: Routh also sees growth potential in rising new-car sales this year. Most new cars come with Sirius XM radio and a free trial period. The subscriber conversion rate is 37%. To date, this has been the biggest source of new subscriptions.

4. Investors should continue to benefit from prodigious cash flow: Sirius XM produced $1.2 billion worth of cash flow last year. It returned $657 million of that to shareholders via dividends and share buybacks. Sirius will continue use cash flow to enhance shareholder value this way. It plans $200 million in cost cuts in 2024, boosting cash flow even more.

"They have such a big installed subscriber base, the cash flow is huge," Routh says. The 34 million subscriber base has a monthly churn of 1.6%, implying that customers stay around for five years on average. Routh adds that Sirius XM "could shrink the equity so much every year that it almost guarantees the stock price will not go down."

Michael Brush is a columnist for MarketWatch. At the time of publication, he owned LSXMA, LSXMK and SIRI. Brush has suggested BRK.B, LSXMA, LSXMK and SIRI in his stock newsletter, Brush Up on Stocks. Follow him on X @mbrushstocks.

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Also read: Even Warren Buffett is no match for the S&P 500

-Michael Brush

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03-02-24 0942ET

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