Spotify Technology S.A. (NSYE: 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 96% over the last day, prompting investors to look deeper into the company before making an investment decision. Currently, shares of Spotify trade at $73.70 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.
Spotify's shares were having a good month prior to its earnings report. In fact, the stock had risen around 10% before tumbling.
Over the last few decades, music streaming has emerged as the largest driver of growth in the $28 billion global recorded music industry, and as the leader, Spotify benefits (especially now that Apple Music has increased prices too).
The company reported a 20% year-over-year increase in monthly active years for the third quarter. While growth in premium subscriptions has slowed recently, management said that subscribers exceeded their guidance by 1 million in the quarter.
Investors were also speculating that Spotify would have an opportunity to increase its subscription prices, with competitors Apple and YouTube announcing price increases earlier in the month.
Management expects a gross margin between 40% and 50% for its podcasting business. Since Spotify is still the only audio streaming service with integrated podcasts and audiobooks, staying on top of the competition in these niches should be a breeze.
Wall Street giants give Spotify a buy rating. Citigroup currently has a price target of $140, which implies 87% upside from the current share price. And while Goldman Sachs has a neutral rating on Spotify, its price target of $114 is 50% higher than where Spotify trades as of this writing.
With the stock down nearly 70% year-to-date, this could mark an attractive entry point for investors who want to capitalize on that potential bounce.
Although its narrow margins result in much higher valuation multiples on the basis of EBITDA and cash flow, Spotify’s 1.29 price-to-sales ratio still seems attractive and it would be wise to buy now.
Negative Hype
Despite its recent positive hype, Spotify is not immune to having drawbacks. Here are some of them.
Spotify's net losses were larger than anticipated. It's also struggling to drive growth in its advertising business, despite investing resources in that revenue stream.
The company's gross margin and operating margin have declined significantly over the past year, indicating that the cost of deals with The Ringer, Gimlet and Anchor have taken their toll.
Wall Street is concerned about Spotify's operating loss of $228 million last quarter, which has worsened this year as more users opt to sign up for free ad-supported plans that generate lower margins than paid subscriptions.
Conclusion
Spotify's earnings could have been more spectacular, but it's hard to see how the fundamental outlook for the business changed so dramatically from the news. Spotify's management has indicated that many of its prominent challenges are short-term in nature, brought on by geopolitical events and a temporary pullback in advertising due to weak economic growth in Europe and Asia. However, a sell-off in the stock over Spotify's profitability is a no-brainer buying opportunity because music streaming services are considered to be under-monetized, meaning the low prices for Spotify make it the perfect buy now.
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