After a glance at Berkshire Hathaway's public equities portfolio, you'll quickly realize that just a handful of businesses dominate. I'm talking about Apple, Bank of America, and American Express, which -- combined -- constitute an astounding 63.8% of its holdings.
But there are also little-known positions like Sirius XM Holdings (NASDAQ: SIRI). This audio entertainment stock makes up a tiny portion of the overall portfolio and has fallen 15% in the last five years.
Despite the Oracle of Omaha and his team's stamp of approval, there are three reasons to avoid this company. Let's take a closer look at the problems with Sirius XM.
Struggling to gain subscribers
As of Dec. 31, the business had a total of 39.9 million subscribers. This includes paid and promotional customers for both Sirius XM and Pandora, the streaming service it acquired in 2019. That's a decent enough user base and has helped the company generate revenue of $9 billion in 2023.
The issue, though, is that the subscriber count has remained flat. The Sirius XM service had 33.9 million customers at the end of last year, slightly less than it did five years ago. And it's a similar situation for Pandora, which counts about the same number of self-pay subscribers now as it did at the end of 2018.
For what it's worth, the customers who do pay for Sirius XM are sticky, as the service boasts a monthly churn rate of just 1.6%. And management is focused on improving the value proposition of the app with more differentiated content and better pricing.
However, I'm not optimistic about the company's ability to grow its user base going forward. The business depends heavily on new vehicle sales that come equipped with preinstalled subscriptions, hoping to transition these free plans to paid ones. This strategy clearly hasn't worked well in the past.
A key reason the business has struggled to add new subscribers is because of how much competition there is in this part of the media and entertainment sector. It's not a coincidence that Sirius XM's flatlining user base has happened at the same time that larger tech firms are finding success in the space.
Think about Apple Music, Spotify, and Alphabet's YouTube and YouTube TV. They are incredibly popular, with billions of users combined between them. And they can satisfy all of the content needs that a person might have, whether it's music, news, sports, or podcasts.
I'll also point to the advancements in smartphones and internet connectivity that diminish the advantage Sirius XM had by being the only satellite radio provider in the U.S. New vehicles these days allow for the seamless connection of a mobile device, which means users can play content from any number of apps while in their cars.
Huge debt burden
Investors looking for companies to own for the long term should place financial soundness as a top priority. This means consistent profits, but it also means having a strong balance sheet.
Here's where Sirius XM falters. It had $9.2 billion of debt on the books as of Dec. 31. This means the debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio sits at a sizable 3.7. Anything over three is cause for concern. And having such elevated levels of borrowing adds financial risk, particularly if economic conditions deteriorate and revenue and earnings drop.
Even though a great investor like Warren Buffett has this stock in his company's portfolio, it doesn't necessarily mean you should. As you can see, there are multiple reasons to avoid Sirius XM right now.
Should you invest $1,000 in Sirius XM right now?
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Apple, Bank of America, Berkshire Hathaway, and Spotify Technology. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.