Warren Buffett had a lot of trouble finding a good stock to buy in today’s market. This is evidenced by the $168 billion in cash and government bonds lying on top Berkshire Hathaway‘S (NYSE:BRK.A)(NYSE:BRK.B) Balance sheet at the end of 2023. But one stock has caught the attention of him and his investment colleagues Ted Weschler and Todd Combs lately.
These Berkshire fund managers have invested around $2.8 billion in the company so far, after investing over $760 million more in the company in March and nearly $100 million more so far in April. Despite the significant stake in the company, the holding still represents less than 1% of Berkshire’s total investment portfolio. That highlights the challenge for Buffett to find an investment big enough to move Berkshire.
But for anyone who wants to invest like Warren Buffett, it could be a great opportunity to follow in his footsteps and buy a value stock that he and his team find interesting.
Here’s the value stock Warren Buffett can’t stop buying
Starting in the third quarter of 2023, Berkshire Hathaway started investing in an interesting stock: Liberty SiriusXM (NASDAQ:LSXMA) (NASDAQ:LSXMK).
Liberty SiriusXM is a special type of stock called a “tracking stock.” Tracking stocks are used to track the business activities of a specific segment of a company. In this case, Liberty SiriusXM is pursuing Liberty Media’s share SiriusXM (NASDAQ:SIRI).
According to SEC filings, Berkshire has owned a small amount of Sirius stock since the third quarter of last year and has continued to primarily add to its tracking stock holdings.
The reason seems pretty simple. The business of Sirius
In December, Liberty Media announced a deal to combine its shares with Sirius XM. The result is that Liberty SiriusXM shareholders will receive approximately 8.4 shares of new Sirius XM stock when the transaction closes, which is expected in the third quarter of this year. At today’s market price, 9.4 shares of Sirius XM are worth about $28.25. Meanwhile, the same amount of Liberty SiriusXM stock is trading for just $26.20.
Importantly, this appears to be more than just an arbitrage game. Something Buffett and his team did with Activision after the announced acquisition Microsoft. In this deal, Buffett took advantage of the discrepancy between Activision’s share price and the agreed purchase price.
However, in this case, Berkshire also purchased a small amount of Sirius XM stock. Additionally, the discount offered by Liberty SiriusXM tracking stock has almost dried up. When the merger was announced in December, shareholders could have received a 35% discount. Therefore, the future performance of the tracking stock is closely linked to the performance of Sirius XM itself.
Here’s why Berkshire likes Sirius XM
Sirius XM is the largest satellite radio operator in the United States. And while most radio operators make the majority of their revenue from advertising, Sirius XM generates the majority of its revenue from subscriptions. This makes the company far more resilient to economic cycles and generates more consistent revenue.
While the number of subscribers has stagnated at around 34 million in recent years, there is still room for this number to grow. Management increased the number of customers using a free trial to 7.2 million at the end of last year, up from 6.8 million the year before. With a subscriber churn rate of 1.6%, we should be able to convert a large portion of these test members into self-paying subscribers over the next year.
Investments are also being made in expanding the upper funnel area. The company is expanding its library of exclusive content while working with automakers to install its latest devices, which has resulted in improved conversion rates from trial users to self-payers.
Streaming remains the biggest threat to Sirius XM. To counter this threat, the company acquired Pandora, but it remains a small part of the overall business. Sirius’ Biggest Advantage This has allowed the company to generate a strong gross margin compared to its competitors and has more freedom to invest in expanding its subscriber base.
Sirius stock At this valuation, there is far more upside potential for the stock than downside potential. And if you get a further discount on the shares by purchasing Liberty SiriusXM tracker stock, that’s an even better deal. That’s why Buffett and his team can’t stop buying the stock.
Should you invest $1,000 in Liberty SiriusXM Group now?
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Adam Levy holds positions at Microsoft. The Motley Fool has positions in and recommends Berkshire Hathaway and Microsoft. The Motley Fool recommends the following options: long $395 January 2026 calls on Microsoft and short $405 January 2026 calls on Microsoft. The Motley Fool has a disclosure policy.
Warren Buffett Can’t Stop Buying This Incredibly Valuable Stock was originally published by The Motley Fool