Sirius XM Holdings (NASDAQ: SIRI) is facing a transitional year. In 2024, shares declined 58%. And looking ahead at 2025, the satellite radio provider is looking at continued losses, at least in terms of its revenue and subscriber count. But some legendary investors like Warren Buffett are betting big on a turnaround. Just in the past week, Buffett’s holding company, Berkshire Hathaway, bought up approximately $54 million of Sirius XM stock, increasing its stake in the company to $2.9 billion.
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Before you rush to bet alongside Buffett on this potential comeback story, there’s one key metric you need to be watching closely.
So, why is Buffett betting big on Sirius XM as the company loses subscribers and just posted a net loss of $2.1 billion for 2024? It all comes down to free cash flow. The company’s profits have gyrated over the last decade, and last year’s loss was due to a non-cash impairment charge on goodwill. But quarterly free-cash-flow generation has consistently ranged between $150 million and $500 million. This has given Sirius XM plenty of flexibility to pay a rising dividend, buy back stock, and shoulder periods of stagnating revenues.
Data by YCharts.
Now trading at just 1 times trailing sales and 9 times free cash flow, Sirius XM is a bargain relative to its historical valuation. But if the company can’t keep its cash flow up, problems could quickly arise. The company’s dividend yield is currently 5%, and its share repurchase program is targeting more than $1 billion in additional buybacks. Meanwhile, mounting competition from streaming companies will likely force the business to reinvest in new products and services to remain competitive. If free cash flow dries up, all of these programs could see deep cuts.
With $2.9 billion invested, Buffett and his team appear confident in a turnaround, but that bet hinges on Sirius XM’s ability to sustain its cash flow. If it can do so, the recent losses only disguise the company’s ability to finance its turnaround effort.
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Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
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