SiriusXM Holdings‘ (SIRI 5.28%) may have fallen out of favor with most investors, but arguably the best stock picker of our time sees things differently. Warren Buffett’s Berkshire-Hathaway (BRK.A 0.82%) (BRK.B 0.72%) did not make many portfolio changes in the second quarter, but one of the few changes it made was to dramatically increase its stake in the satellite radio provider.

Berkshire Hathaway said in an SEC filing after the market closed Wednesday that it owned 132.9 million shares of Sirius XM at the end of June, up from 36.7 million three months earlier. That represents a nearly $400 million stake in the media giant.

We don’t know Buffett’s reasoning for increasing his stake in one of the most disappointing companies in Berkshire Hathaway’s stock portfolio this year. This is a cold-blooded regulatory filing, not a heartfelt letter from Buffett to shareholders or a conversation with investors at the company’s legendary annual shareholder meeting. But it’s a big move that needs to be discussed. I guess I should speculate.

Around the dial

Sirius XM shares opened 8% higher on Thursday after Buffett’s surprisingly strong move. Even after the jump, the satellite radio monopoly is still trading more than 40% lower in 2024.

Sirius XM posted a bigger-than-expected 3% drop in second-quarter revenue, the second-biggest drop in the 30 years it was IPO-listed. Only the 5% year-over-year decline in the pandemic-hit second quarter of 2020 was worse. But it wasn’t the failure that set off the market’s Christmas warning bell for Buffett. He was already piling on the stock in the second quarter itself. The upstart provider of nationwide car audio programming reported its latest financials earlier this month.

The move is also surprising considering what another big-name billionaire is doing. Media mogul John Malone is Sirius XM’s largest shareholder, and people can get a piece of his controlling position by owning: Liberty Sirius XM Group (LSXMA 3.71%) Tracking stocks. Tracking stocks can be confusing and are not very popular with investors, but that may soon change.

Liberty Sirius XM Group investors will vote late next week on whether to combine their shares with Sirius XM’s more widely held common stock. If the vote is successful – and it will likely be, given that Malone is championing it and the shares are trading at a discount to Sirius XM – the transaction would close on September 9.

Buffett is always looking for ways to get more for his money. He already owns a large position in Liberty Sirius XM Group. Why did he buy more Sirius XM when he could have instead just bought more of the tracking stocks to get in cheaper before the merger next month? I don’t have an answer for that, but I do have a theory as to why Sirius XM was one of his few new additions last quarter.

Image source: Getty Images.

Face the music

Sirius XM is cheap right now, and not just because the price chart tells us shares are low. Despite the media stock’s disappointing financials of late, that’s hardly news. Sirius XM hasn’t posted double-digit organic revenue growth since 2014. Satellite radio is a tough sell to drivers in the age of connected cars, when more and more cars on the road have easy access to streaming apps.

However, Sirius XM remains popular. The platform has around 33 million subscribers. The recent drop in subscriber numbers is problematic, but attrition is near historic lows. Sirius XM has leveraged the scalability of its business model to acquire proprietary content that keeps users engaged. The challenge right now is expanding the funnel of new trial users.

Meanwhile, Sirius XM has been consistently profitable. Plus, the company has aggressively repurchased shares with its ten-figure free cash flow, making per-share profitability more attractive than the actual increase in net income. The stock trades at less than 10 times trailing-twelve-month earnings. Plus, the company uses its money-making strength to pay a dividend that has increased every year since it instituted a payout policy in 2016. Now it’s yielding a respectable 3.7% to its patient investors.

The sluggish revenue growth, leveraged balance sheet and possible slow exit of the satellite radio model cannot be ignored. However, the market appears to have more than devalued Sirius XM itself. With so many other characteristics that are Buffett’s specialty, it’s no surprise that he bought when the market sold.