Berkshire Hathaway made great strides with SiriusXM (SIRI -0.49%) this month. The investment conglomerate led by Warren Buffett has increased its position in the audio and entertainment platform to 32%, worth around $3 billion at the time of writing. This purchase took place in conjunction with Sirius XM consolidating all of its tracking inventory into one entity.

The company has struggled with the rise of audio streaming services, with the stock posting a negative total return over the past 10 years as the broader market soared. However, Buffett has been buying lately. Let’s see if you should follow in his footsteps and take a position in Sirius XM stock.

Stagnating subscribers, sector in transition

Sirius XM became famous for its satellite radio subscription service. The key to the company’s success has been striking deals with automakers to bundle its service with the purchase of a new car, making the premium radio service a small add-on to the purchase of a big customer. Today, Sirius XM has 33 million total subscribers.

The problem is that this represents fewer subscribers than in 2018, when 33.5 million people subscribed to Sirius XM. Over the past 15 years, the audio industry has evolved from radio services to paid subscription and advertising streaming services such as Spotify. People can now easily connect their smartphones to cars using Bluetooth, auxiliary cords, or built-in operating systems, just like in a Tesla. Spotify has 246 million paying subscribers, a number that has increased 10-fold over the past 10 years.

Sirius XM has an audio streaming service, Pandora, but this segment has struggled compared to Spotify and YouTube. It only had 6 million total users last quarter. Spotify and other streaming competitors are significantly larger and have a considerable lead in the industry. It wouldn’t be surprising if Pandora was very unprofitable for Sirius XM and on the verge of going out of business within the next few years.

Shrinking margins and high debt levels

Management boasts about Sirius XM’s subscriber churn rate, which stood at just 1.5% last quarter and was consistent with the same period in 2023. That’s a good thing. You don’t want a bunch of people unsubscribing every quarter.

However, concerns remain about how much Sirius XM needs to spend to retain these users. The company has made expensive content deals, like with Howard Stern, and is increasingly pursuing podcast deals, like its $100 million deal for Call her daddy. Podcasts are the future of talk radio, and Sirius XM is trying to make the pivot.

All this spending has not led to revenue growth. In fact, revenues declined, impacting the company’s profit margins. Operating margin was 23.3% over the trailing 12 months, up from 30% in 2018. And that doesn’t include expenses related to Sirius XM’s massive debt load, which stands at about $9 billion . Sirius XM’s total interest expense was $416 million over the past 12 months, a large portion of its $2 billion in operating profit. If revenues continue to decline, profits will continue to decline. But the interest charges will remain the same.

SIRI Free Cash Flow data by Y Charts

Is the stock a buy?

Simply put, Sirius XM stock is not a buy. Far from it.

The stock trades at a market cap of $9 billion. Add to that its $9 billion in debt and you get an enterprise value of $18 billion. This year, management expects to generate $1.2 billion in free cash flow, or 15 times its enterprise value. Investors should use company value, not market cap, to account for Sirius XM’s significant debt. A 15x multiple of free cash flow to a company’s enterprise value may seem attractive for a growing company, but Sirius XM’s financials point in the wrong direction.

In fact, free cash flow peaked many years ago and shows no signs of recovery. With subscriber numbers declining and content costs rising, it appears that Sirius XM’s business will only get worse in the years to come. Don’t follow Buffett and try to figure this out falling knife.