Warren Buffett, one of the greatest investors of all time, has said over the years that a company’s competitive advantage is the key to its success. The term he uses for competitive advantage is moat, explains Charles Mizrahi, value investing expert and editor of Park Avenue Investment Club.
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Following the merger of satellite radio companies Sirius and XM in 2008, Sirius XM Holdings (SIRI) became the only satellite radio provider in the United States.
SIRI offers mostly commercial-free radio in subscription packages ranging from $11 to $20 per month. It has over 175 channels. The company now has more than 31 million subscribers.
The company has a monopoly on satellite radio in the United States and is the only service provider of its kind. SIRI has 100% penetration in new luxury cars and 75% penetration in all new cars in the United States.
It was able to attain this market share by often subsidizing the cost of satellite radio installations in vehicles. As a result, satellite radio has become a standard feature in luxury vehicles.
How would a competitor even think it could cross that wide of a moat and attack the castle? First, a competitor would have to obtain satellite broadcasting licenses from the FCC. Next, a competitor would need to design and build satellites and their supporting infrastructure.
While possible, we think it is highly unlikely that a competitor would go through all the investment and time to compete with SIRI. It truly is the king of its castle, with a very wide moat protecting it.
Future growth will come from the more profitable used car market, which is 2.5 times the size of the new car market.
Earnings per share have also been growing due to share buybacks, subscriber growth, and price increases. Over the past three years, earnings have grown by 35% per year. While SIRI is not trading at a bargain price, it is trading at a price that should provide a very good return.
When factoring in the valuation, I consider SIRI a business with high-quality subscribers, strong connections with car companies, no competitors, and a great management team that is buying $2 billion worth of its own shares each year.
Warren Buffett’s Berkshire Hathaway took a stake in SIRI at the end of 2016 and recently added to it in the first quarter of 2017. Over the long term, SIRI has all the makings of a potential 10 bagger.
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