Berkshire Hathaway President Warren Buffett is essentially a value investor. Value investing involves finding stocks that are trading below their intrinsic value and buying them at a discount. While the concept often seems like a no-brainer, value investing is much harder than it seems because many stocks are on sale for a reason. Investors will struggle to decide if a stock truly has value or if it is a value trap.
An equity stake in Berkshire’s portfolio found itself in the middle of this same discussion: Sirius XM Holdings (NASDAQ:SIRI). Shares of the digital audio company have fallen nearly 58% this year and some Wall Street analysts recently downgraded it. Despite Sirius’ struggles, Berkshire has been buying shares all year. Does Warren Buffett know something Wall Street doesn’t?
Let’s take a look.
Sirius operates the Sirius satellite radio and the Pandora music streaming service. Earlier this year, the company spun off from Liberty Media, in an attempt to simplify its corporate structure, and also carried out a 1-for-10 reverse stock split to make it more attractive to investors. The company has also embarked on a new strategy that involves developing its podcast platform by purchasing exclusive distribution and advertising sales rights from big brands such as Call Her Daddy and Smartless.
The new strategy caught the attention of Buffett, who loves a good comeback story. It also doesn’t hurt that Sirius is paying a handsome 4.6% dividend yield and is contemplating a share buyback. This allows investors to earn passive income while the company executes a turnaround story.
However, Sirius recently demonstrated that most change stories require patience. The company provided a strategic update and updated guidance for 2025. Sirius expects next year’s revenue to reach around $8.5 billion, which missed previous analyst estimates. This would represent a decline in projected revenue for 2024 and is concerning because the company has seen subscriber declines at times this year.
In its strategic update, Sirius also said it is targeting $200 million in run-rate savings by the end of the year and further debt reduction of approximately $700. Management also said it is committed to maintaining the company’s dividend.
The updated guidance prompted several downgrades from analysts, who also lowered their price targets, citing headwinds driven by disappointing guidance and subscriber trends. In many cases, companies trying to execute a turnaround struggle if they can’t show the potential to grow revenue and profits because investors doubt the strength of the core business.