Sirius XM is poised to grow its free cash flow, but subscriber numbers have been trending downward.
Shares of retailer Costco have soared over the long term thanks to its focus on customer value.
Sirius XM trades at a cheap valuation, while Costco commands a fairly high premium.
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As of September 30, Berkshire Hathaway owned 37% of the outstanding shares of satellite radio provider Sirius XM(NASDAQ:SIRI). The Warren Buffett-led conglomerate is selective about the businesses it adds to its portfolio, so when it takes on a stake this big, investors take notice.
However, Sirius XM hasn’t been a great investment. actions of the share value They have plummeted 65% in the last five years (as of December 10). It even had to engage in a 1-for-10 reverse stock split in September 2024 to get its stock price out of the penny stock zone. This type of disappointing performance does little to give the investment community confidence.
Should you forget about Sirius XM? There is another action that has made many more millionaires. Let’s consider them both.
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Sirius XM is screening free cash flow (FCF) of more than $1.2 billion dollars this year. Thanks to reductions in capital expenditureManagement believes the company will report FCF of $1.5 billion in 2027. That would be a 39% increase over two years. This would give the leadership team some resources with which to begin paying down the company’s debt, which currently stands at $10.1 billion. Share buybacks are also on the table.
The company’s rising FCF is certainly a favorable trend and investors should keep an eye on it to see if it persists. Investors might also appreciate how cheap the stock is, trading at a forward price-to-earnings (P/E) ratio of just 7.2. Add to that its dividend, which at the current share price yields around 4.8%, and it makes sense that some investors might be interested in this setup. There could be some advantages.
But there’s also a real question about whether Sirius XM is a classic or not. value trap. To be fair, the company collects predictable revenue streams in the form of subscriptions, which amounted to $1.6 billion in the third quarter. And it faces no direct competition, as there are no other satellite radio operators in the US.
However, Sirius XM appears to be on the wrong side of technological innovation trends. Faster internet speeds and near-ubiquitous smartphone adoption have combined to create an environment in which digital music streaming platforms can thrive, providing consumers with a compelling value proposition. Not surprisingly, Sirius XM’s number of self-pay subscribers has declined for several consecutive quarters, putting pressure on revenue.
Maybe it’s time to forget about this action.
Perhaps it would be better to focus on the warehouse retail giant. Wholesale Costco(NASDAQ: COST). Throughout its history, it has been a million-dollar stock. In the last 30 years, the share price has skyrocketed 10,260%. With the company’s dividends reinvested, its 30-year total return comes to a staggering 15,660%. So if someone bought $6,400 worth of Costco stock in December 1995, set up automatic dividend reinvestment, and held on to it, they would have a stake valued at just over $1 million today.
Costco has been essentially immune to the impacts of technological change. E-commerce continues to penetrate the retail sector, as evidenced by the enormous success of companies such as Amazon and buy. However, consumers still love the Costco shopping experience, with its no-frills environment, high-quality products, and extremely low prices.
The warehouse retailer has been able to grow steadily same store saleswhich is the holy grail in the retail world. Demand for its offerings is strong in virtually any economic scenario, even pandemic-driven recessions. This makes Costco a safe stock pick.
The retailer enjoys tremendous customer loyalty, fueled by the lucrative membership program that provides most of its profit margin. Management also seeks to consistently keep prices low for buyers. And Costco’s massive scale, with fiscal 2025 net sales of $270 billion, allows it to negotiate favorable terms with its suppliers.
Unlike Sirius XM, which is trading at a very cheap valuation right now, Costco continues to trade at a premium. Although the stock is down 19% from the high it reached about a year ago, its forward price-to-earnings ratio of 44 is expensive. Costco doesn’t look like a sure-fire buying opportunity currently, so investors may want to be patient and wait for a more attractive valuation.
For different reasons, neither Costco nor Sirius XM seem like smart additions to your portfolio right now.
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Neil Patel has no position in any of the stocks mentioned. The Motley Fool ranks and recommends Amazon, Berkshire Hathaway, Costco Wholesale, and Shopify. The Motley Fool has a disclosure policy.
Should you forget about Sirius XM? This Stock Has Made Many More Millionaires was originally published by The Motley Fool
