Is Sirius XM a Buy, Sell, or Hold in 2025?

It's hard to believe, but fall has arrived. Before you know it, Thanksgiving and the year-end holidays will be upon us. Before the year-end craziness sets in and you busily prepare to celebrate with friends and family, it's a good time to think about your investments with an eye toward making decisions heading into next year -- always with a long-term investing framework in mind.

Sirius XM Holdings' (NASDAQ: SIRI) is one company worth a closer look. The shares have not performed well in the past year, dropping by about 48%. During this time, the S&P 500 has gained over 33%. But it's important not to jump on board just because the stock has fallen. Plenty of investors have fallen for a value trap.

Let's take a step back and analyze Sirius XM's prospects and valuation before making a decision.

Image source: Getty Images.

Losing subscribers at core business

Sirius XM consists of two major businesses. One is its namesake, Sirius XM, which offers satellite radio. The other, Pandora, offers streaming. It's important to examine each one, starting with its core satellite-radio division.

The Sirius XM segment primarily generates revenue from subscription fees. While these tend to be more stable and reliable than advertising, the business faces intense competition, including free radio.

Trends haven't been going in the right direction for the business. Unfortunately, subscriber counts keep dropping. In the second quarter, self-paying subscribers dropped by about 100,000 from the previous quarter to under 31.5 million and down from 31.9 million a year ago. This helped drive Sirius XM's divisional Q2 revenue down by 5% from a year ago to $1.6 billion.

Stabilizing streaming business

The Pandora and off-platform business primarily derive revenue from advertising. The number of monthly active users edged up to 45.1 million from 45 million in the previous quarter. Still, that's down from 47.4 million a year ago.

Advertising revenue was flat, standing at $400 million, versus last year. Total revenue was $538 million, up 1.9% year over year. That's hardly exciting growth, and the business's revenue could come under pressure when the economy slows down, affecting advertising.

The business represents 25% of Sirius XM's revenue. Hence, this tepid growth wasn't enough to offset the declining satellite-segment's revenue. Overall, the company's top line dropped 3.2% to $2.2 billion.

Keeping an eye on costs

Facing a challenging revenue environment, management has kept on eye an costs. It lowered operating costs by 5.5% to under $1.7 billion in the latest quarter.

This allowed Sirius XM to grow net income by 1.9% to $316 million. Still, management can't rely exclusively on cutting costs to boost profitability. At some point, it will need to stem the revenue decline and grow the top line. Based on recent trends, that seems challenging.

It's always good when management controls expenses. However, when it comes to investing, it shouldn't replace revenue growth as the main profit driver.

The decision

Sirius XM does offer an attractive 4.4% dividend yield compared to 1.3% for the S&P 500. With a 28% payout ratio, the dividends don't seem like they're in danger right now. You may feel tempted to invest in the stock for the dividends while waiting for revenue growth to pick up.

Still, I'd take a cautious approach based on its ability to sustain profit growth, which ultimately funds dividends. The share-price drop has translated into a cheaper valuation with the stock's price-to-earnings (P/E) ratio going from 16 to 7 over the last year. During this time, the S&P 500's P/E multiple went from 23 to 29.

However, you wouldn't want to jump in merely because the price was cut in half. With intense competition, a falling number of subscribers, and lower revenue, I'd advise investors to pass and find better investment opportunities.

Should you invest $1,000 in Sirius XM right now?

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Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.