Sirius XM Stock Is Beaten Down Now, But It Could 10X

Sirius XM Holdings (NASDAQ: SIRI) is one of the cheapest stocks out there, but there's an obvious joke behind the notion that the satellite radio provider can appreciate tenfold from here. Sirius XM executed a 1-for-10 reverse split four months ago. If it wants to 10x, can't it just declare another 1-for-10 reverse split to multiply its share price by 10 while shrinking its share count by 90%?

Ha ha. That's amusing.

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It's time to get serious about Sirius. Of stocks that started 2024 as large caps, the media giant had one of last year's worst performances. It surrendered more than half its value, closing out the year as an out-of-favor mid cap. Sirius XM hit an 11-year low last month. The starting line now is brutal but opportunistic.

Out of this world

A lot of things are going wrong at Sirius XM these days. The 33.2 million subscribers it was serving at the end of September are 2% fewer than its audience a year earlier. Revenue is declining for the second year in a row. The disappointing guidance it issued last month for 2025 came less than two months after it hosed down its 2024 revenue target. The same company that was targeting $1.2 billion in annual free cash flow at the start of 2024 is now forecasting just $1 billion.

You can rightfully argue that Sirius XM deserved to be marked down, but is a 58% slide during a rising year for the market fair? It's hard to make that extreme argument when Sirius XM has been a profitable but meandering business for the past decade. This tune has been fading out for years.

Obviously last year's sell-off alone doesn't justify Sirius XM potentially popping tenfold. With the shares continuing to drift lower in 2025, the stock would have to quadruple from where it was at the beginning of last year to 10x from today's starting line. A lot of things would have to go right -- you know, like the actual business starting to grow again instead of backpedaling. It can happen, but let's start with someone who apparently thinks that now is a good time to take a chance on an out-of-favor company with a monopoly in its niche.

Image source: Getty Images.

Holding an empty plate in the Buffett line

Warren Buffett's Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) is an investor in Sirius XM. It's one of the roughly three dozen stocks in the holding company's portfolio of publicly traded investments. Buffett initially owned a chunk of Sirius XM. He also collected the tracking shares issued by majority shareholder John Malone that offered a way into the media stock at a discount.

When the tracking shares were absorbed into the common stock this past summer -- the reason for the 1-for-10 stock split -- Berkshire Hathaway converted its entire stake into Sirius XM. It wasn't surprising that Sirius XM continued to sell off after the transaction. Owners of the tracking shares, who no longer had a discounted way into Sirius XM, found another mispriced market opportunity. The reverse split also likely sent speculators of low-priced stocks elsewhere.

When Sirius XM continued to slide after the transaction, I imagine that Buffett realized that Sirius XM itself was the new discounted way into the platform operator. Berkshire Hathaway added to its position in October and then again in December.

Even a generational investor like Buffett makes mistakes. Berkshire Hathaway now owns more than a third of Sirius XM's outstanding shares, but that doesn't mean it will become the next fully owned subsidiary. Even if Buffett decided to take Sirius XM private, it obviously wouldn't be at a price 10 times higher than today's.

The running of the bulls

Sirius XM needs bullish catalysts to trigger an uptick in subscribers, revenue, and profitability. They aren't as hard to find as you might think. Let's start with your car. It's where satellite radio is most often consumed. The more time you spend in your car, the more value you derive from a flat monthly subscription to Sirius XM that gives you coast-to-coast content without making you fumble for Bluetooth connectivity. Did you know that gas prices have fallen sharply since May of last year? What do you think happens to commuter counts and traffic as companies start to call employees back to in-office work?

It would be nice to see the auto market itself also pick up to give first-time buyers a set of keys. Auto loans remain high, but they won't always be that way. No one is implying that Sirius XM may 10x in a year or two. It will take time, and at some point in the next few years, you will see a spike in new vehicle sales when the economic and lending climates are kind at the same time.

For now, you have cheap stock in Sirius XM. The shares trade for just 7 times forward earnings, and that's with depressed profit targets following Sirius XM's unsettling guidance last month. The moment the business starts showing traces of a turnaround, the estimates will move up and the forward P/E ratio will get smaller if the shares don't shoot higher first. And the dividend just rose above $5 because of the cascading share price and the latest payout hike.

Now let's get to two final points. Buffett's heightened presence invites a new tier of value investors who were Sirius XM-agnostic before. It also shrinks the potential float if he's going to clutch his shares tightly. Then you have Sirius XM as a serial eater of its own cooking. It has routinely used its massive free cash flow to repurchase shares. Its split-adjusted share count has been reduced by 42% since peaking in 2012. With the stock lower, it can get even more bang for its buyback buck. It's easier for a stock to rise tenfold when there are fewer shares out there since the market cap doesn't have to 10x that way.

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Rick Munarriz has positions in Sirius XM. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.