$SIRI - A Possible $AAPL Merger in the Making?

3 thg 12, 2023

Known as the "Oracle of Omaha," Warren Buffett is renowned for his ability to move markets through Berkshire Hathaway's disclosed buys or sells. This phenomenon has been termed the "Warren Buffett Effect”. 

Buffett is arguably the best investor ever to live, and due to his success and the large number of investors attempting to emulate his every move, any company lucky enough to get into Buffet's crosshairs usually gets a significant pump.

The latest lucky company to experience the “Warren Buffett Effect” is Sirius XM Holdings Inc. (NASDAQ: SIRI), whose stock soared 16% after Berkshire Hathaway disclosed a new 9.6 million-share position valued at $43.8 million in his latest 13F disclosure last week.

There were other new buys listed, but why was SIRI stock the only company to get investor love? Well, it could be that Sirius XM has been struggling over the past years. Or it could be that the company hit a 7-year low earlier this year. Or maybe that Sirius XM’s Volatility has always been a mainstay for its stock since its IPO nearly 30 years ago.

This is weird, especially since Buffet is known for investing only in solid companies with proven track records. So, does Buffet see an undervalued company about to turn around?

SIRI History

Sirius XM was founded in 1990 by David Margolese, Robert Briskman, and Martine Rothblatt as a satellite radio service called Sirius Satellite Radio. The company IPO’d in September 1994 at $4.5. However, it failed to capture investors' interest because they feared the FCC wouldn't allow satellite radio to be deployed. The share price quickly started to fall in the coming months, reaching a low of $1.4. 

It wasn't until Margolese, the CEO at the time, spent the following years after raising US$1.6 billion and successfully lobbying the FCC to allow satellite radio to be deployed, that the SIRI stock price started rebounding and entered an uptrend in 1996, reaching an all-time high of $69.44 at the peak of the bull market by 2000.  

But the success was not meant to last, and when the dot-com bubble burst in 2000, and the stock market crashed, Sirius XM went down with it. A year later, Margolese left the company, leaving his role as CEO and handing over the reins to Joe Clayton, former CEO of Global Crossing.

Sirius XM wouldn't break out of its downtrend until 2004, right around the time Clayton stepped down as CEO, and Mel Karmazin, former president of Viacom, took over for him.

In 2005, rumors started swirling that Sirius and XM would merge in a behemoth 13B deal. However, as luck would have it, when the housing bubble burst, causing the market to crash. That sent Sirius XM to an all-time low of just 5 cents, bringing it to the verge of bankruptcy. 

After a 57-week review process, the U.S. Justice Department approved the Sirius and XM merger on March 24, 2008, and with a $530 million loan from Liberty Media, the media conglomerate founded by John C. Malone in February 2009, in exchange for a 40% equity stake in SiriusXM, they were able to avoid declaring bankruptcy, peaking near $7 in 2018, a level it wouldn't reach again till after 2020. 

Continuing the theme of bad luck, we know what happened in 2020. The pandemic hit and took the markets down with it, and with the people not being able to use their cars, the stock dropped to $3.75, consolidating between $5 and $7. 

That was until February 2nd, 2023—the date of the fateful 2022 annual report. SIRI stock declined by as much as 44% on 2023 guidance, expecting negative self-pay net adds resulting from economic and demand uncertainty as well as softening auto sales due to macro conditions. 

Since then, it’s been a rollercoaster for Sirius XM as it went on to climb 143% from May to July 2023, before sacrificing 56% of its gains in the next two months, then rebounding on Berkshire Hathaway’s news on November 15th.

So now that we understand the valiantly that surrounded Sirius XM’s stock performance over the years, let’s dive deeper into Berkshire Hathaway’s new position in the company and what it could be about.

Why Did Buffet Invest in SIRI Stock?

There are many reasons why Berkshire Hathaway initiated a position in Sirius XM. After all, Buffett has always been enamored by the media and entertainment biz. In his words, ''I like media companies as a business,''  ''I'm interested in the product. I always thought the media had a bright future, but it took Wall Street a long time to appreciate that.'' These were his words in a New York Times interview after he played a key role in brokering Capital Cities’ acquisition of ABC in 1985. 

But that isn’t enough, right? A savvy investor like Buffett wouldn’t invest in a company just because he likes its sector. In fact, Sirius XM has many attractive points that Buffett could leverage to see a return on his investment.

Buffett has a famous saying: "A truly great business must have an enduring 'moat' that protects excellent returns on invested capital." The moat Buffett is talking about refers to a competitive advantage that makes a business unique and better than others. 

Sirius XM has just that. After regulators approved the merger of Sirius and XM in 2007, it’s essentially been a monopoly in satellite radio. Yes, there is a lot of competition in the audio entertainment scene with players like Spotify, Apple, and Amazon, but Sirius XM is the undisputed leader of premium satellite radio. 

In fact, as of 2022, Sirius XM has a penetration rate of 83% among new vehicles and 53% among used vehicles. This is why Sirius XM can easily charge $14 a month for its cheapest plan. Sirius XM offers robust coast-to-coast access to premium content for drivers, a feat not many can say. It’s the undisputed market leader that owns its niche, and this is what Buffett loves.

While that could be enough for Buffet to invest, given that Sirius XM satisfies his main requirements for buying a company, there are a few other reasons that not a lot of people have considered.  

Given Buffett’s status as a living investment legend, he has access to information regular investors may find out weeks or months later when the company announces the news. It is this insider access that might have driven Berkshire Hathaway’s investment in Sirius XM.

But what could Buffett know that the public doesn’t know yet? 

The Apple Link

We know that Apple is currently Berkshire Hathaway’s largest holding. In fact, Apple makes up around 50% of Berkshire Hathaway’s investments. 

Over the past several years, rumors have surfaced about Apple’s intention to enter the automotive industry through an alleged “iCar.” However, Apple has not announced any such plans. 

However, the automotive industry is still very lucrative. So, how can Apple get access to this sector? Easy: entertainment. 

In 2014, Apple launched CarPlay, which enables a car radio or head unit to be a display and controller for an iPhone. Basically, CarPlay allows people to connect their iPhones to their car radios. But still, CarPlay has many limitations. 

The most significant limitation of CarPlay is that it’s dependent on a stable internet connection to access and display apps or stream music. So if you’re in an area with poor or no internet coverage, like when traveling, these features may not work correctly or at all.

Another limitation is that not all apps on your Apple device are compatible with CarPlay. Thus, you only have access to a limited number of apps and features when connected. 

I think you know where this is going. Sirius XM is a satellite radio. So, it doesn’t need good coverage to work; it can work anywhere. Also, since Sirius XM is a radio, it isn’t as distracting to drivers as CarPlay can be. 

But Sirius XM's most crucial advantage over CarPlay is market penetration. As I mentioned earlier, Sirius XM is equipped with 83% of new cars and 53% of used cars in the US. This is a massive market that Apple isn’t monetizing since CarPlay doesn’t contribute to its revenues or profits. It just serves as a way to maintain iPhone users’ loyalty to the brand. 

So now that we can see where Sirius XM can help Apple, a possible reason why Buffett invested in Sirius XM could be a potential upcoming partnership between Apple and Sirius XM. Or even better for Sirius XM’s shareholders, Apple may be contemplating potentially taking over Sirius XM. 

This move would help Apple’s declining revenues return to growing since it could recognize Sirius XM’s subscriptions as its own revenue. Not only that, but Apple can also integrate its other services like Apple Music or Apple TV into Sirius XM’s plans, giving it a strong presence in the US auto market. 

This is a potential reason why Berkshire Hathaway invested in Sirius XM. But there’s still another possible reason.

Liberty Media Merger?

If we look at Berkshire Hathaway’s other buys, we can see that Buffett’s conglomerate bought $8 million worth of shares in the Atlanta Braves MLB team. Berkshire Hathaway also increased its stake in Liberty Media by 16 million shares, so Buffett’s total position is worth around $2.6 billion.

Sirius XM, Liberty Media, and the Atlanta Braves have something in common, or better say, someone. The Cable Cowboy, John Malone. Seen by some as a rival to Buffett, Malone is the Chairman of Liberty Media, which is the parent company of the Atlanta Braves and the majority shareholder of Sirius XM. 

Back in September, the Liberty Sirius XM Group proposed to merge with Sirius XM. While a merger is usually good for the acquired company, this deal is too risky for Sirius XM shareholders. Liberty Media currently owns 83% of Sirius XM, meaning all other investors own 17% of the company. But Liberty Media is proposing to create a new company into which it will place its Sirius XM shares alongside debt associated with them, spin this company out to Liberty’s shareholders, and combine it with Sirius XM. 

Sounds confusing, I know, but this is the way Malone likes to conduct his business. In simple terms, all of this means that Sirius XM shareholders will own 16% of the company, which would be dilutive to Sirius XM shareholders. 

But now that we know that Buffett, who’s already involved with Liberty Media, actually initiated a position in Sirius XM, this could be a sign that Liberty could be preparing to send an improved proposal that pays a premium to Sirius XM’s current shareholders. After all, Warren Buffett didn’t invest in Sirius XM to get diluted. 

Yeah, this could happen, and nothing Buffett does is guaranteed; he, too, has his misses, believe it or not. But the chances of that happening are pretty slim.

Technical Analysis

On the hourly chart, SIRI stock is in a bullish trend as it is trading in an upward channel. Looking at the indicators, the stock is above the 200, 50, and 21 MAs which is a bullish sign. However, the RSI is approaching overbought at 65 while the MACD is bullish.

In terms of its fundamentals, SIRI stock benefited from Berkshire Hathaway’s buy as it soared 16% on the revelation. While the stock has pulled back since then, Berkshire’s buy could be a solid indication that positive news could be coming soon for SIRI stock given Buffett’s track record. As such, bullish investors could find a good entry point on tests of the lower trendline at around $4.6 to start a long position in the stock.

SIRI Forecast

In conclusion, Berkshire Hathaway’s recent investment in SIRI stock has been surprising, to say the least. But given Buffett’s connections and possible insider information, there’s a chance Sirius XM merges with Liberty Media on favorable terms to Sirius XM’s shareholders. Or even better, Apple, Berkshire Hathaway’s largest position, could leverage its connection to Buffett and acquire Sirius XM in what would be a big move by Apple to enter the auto market.