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Hype Asset of the Day | January, 24th, 2022



Spotify Technology S.A. (NYSE: SPOT)

The Swedish company Spotify specializes in music, audiobooks, and podcasts. On April 23, 2006, Daniel Ek and Martin Lorentzon established Spotify, a privately held Swedish supplier of media services including audio streaming. As of September 2022, it had over 456 million monthly active users, including 195 million paid members, making it one of the biggest music streaming service providers. Having seen a recent fall in price, investors are looking to buy the stock now, subsequently allowing Spotify to see an increase in mentions by 91% over the last day, prompting investors to look deeper into the company before making an investment decision. Currently, shares of Spotify trade at $98.90 and some say this might be the last chance to buy it below $100.


Positive Hype

Spotify is one of the biggest names in the industry, and for good reason. Here are some of the ones that led to the company gaining so much positive hype recently.



  • Music streamer Spotify rose 2% on Monday as it joined a growing list of tech firms to announce staff cuts, shedding 6% of its global workforce.


  • In its third quarter, Spotify reported a $228 million operating loss, but the one silver lining is that the company also spent $386 million on research and development during that time, $178 million more than its 2021 third quarter.


  • Spotify's large investments in podcasts and audiobooks may be cutting into profits right now, but those same investments are why it's a smart buy at current prices.


  • Looking past the unprofitable quarter, what should signal better days ahead is Spotify's growing user base. It has 456 million monthly active users (up 20% year over year), with 195 million paying for premium service (up 13% year over year).


  • Spotify continues to expand its users and reap the returns on its podcasts and audiobook investments, which have better profit margins than music streaming -- it has a solid long-term outlook.


  • To monetize podcasts, Spotify has built a dynamic advertising marketplace that connects advertisements with podcast content. This is a small portion of the business today as it was only launched back in 2021, but it could help accelerate Spotify's overall revenue growth in the next few years.


  • In the most recent quarter, ad revenue was up 24% from a year ago to $273 million, which is a small but quickly growing base and where Spotify has a competitive advantage.



Negative Hype

Despite its recent positive hype, Spotify is not immune to having drawbacks. Here are some of them.



  • Spotify's overall revenue compared to under 15% today. Spotify's stock has got walloped in 2022 with shares down 72% this year.


  • Since its initial public offering (IPO), Spotify's stock is down just over 47%, even though it had more than doubled by February 2021. This latest drop is partly due to the company's disappointing earnings, but that shouldn't deter long-term investors.

Conclusion

Investors are undoubtedly concerned about the company's future prospects at the moment, but the stock seems absurdly undervalued to me at a market price of just $15 billion. The business generated $12.2 billion in sales over the past 12 months and is on track to regularly increase this amount over the following ten years. Management believes Spotify can attain profit margins of 10%, which, at current levels, would be equivalent to $1.22 billion in revenue, after it stops heavily reinvesting for growth. This makes sense given that Spotify has a market cap of $15 billion, and now is the ideal time to join the service ahead of the upcoming bull market rise.


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