Stock Analysis: Spotify (SPOT)

Overview

Media-streaming giant Spotify Technology is the world’s most popular audio streaming platform with 365 million monthly active users, including 165 million Spotify Premium subscribers, after gaining 31 million subscribers in 2020. These gains translated into an increase in the SPOT stock price in early 2021, but since then, the stock price has fallen significantly to 2020 levels, reversing the advancements it had made. However, some recent announcements have changed the trajectory of the stock and investors are wondering if it’s a good time to buy.

Analysis

Spotify credits the growing popularity of the podcasts on its platform with the 24% increase in subscribers in late 2020, which, when combined with the launch of its ‘2020 Wrapped’ campaign and several other new features, culminated in an 11% stock price increase on 2 December 2020. The diversification of the services offered by Spotify continued to push the stock price up until it reached its record high of $364.59 on 19 February 2021, but then things took a turn. 

The stock price began to fall due to a disappointing 2021 first-quarter earnings report, which revealed losses of $0.25 per share and led to a reduction in the 2021 forecast for additional monthly active users on the platform, estimating that gains wouldn’t even come close to rivalling those of 2020. This reduction in additional users was thought to be the result of the easing of Covid-19 restrictions across the world, which had fuelled the initial surge in Spotify subscribers the year before. Spotify stock continued to reverse its 2020 progress, notably losing 22% of its value in just 30 days, and although its expansion into podcast streaming had accelerated its progress previously, Spotify’s ambitious goals to expand this service further proved costly – for example, Spotify reportedly paid Joe Rogan over $100 million to sign an exclusive deal with them in May 2021. By July, SPOT stock price was down 38% compared to its February all-time high and competition from rival companies was intensifying, causing a further decline in the year-over-year growth of its users. 

In August, Spotify announced a bearish buyback of $1 billion worth of its shares to be carried out between now and April 2026 which some investors believe signals a lack of high-growth investment opportunities for the company, but since this isn’t Spotify’s first announcement of this kind, its previous repurchase programme showed that buybacks and high-growth investment could co-exist. Additionally, the previous buyback programme only reached 57% of its $1 billion capacity, therefore if the Spotify stock price rebounds between now and 2026, a similar trend is likely to occur. The announcement of buybacks in August led to a 6% jump in the stock price and recently, the stock price rose by a further 4.2% following KeyBanc Capital’s decision to upgrade SPOT from sector-weight to overweight due to evidence that the company is now in a stronger position. The analyst rating is now to buy after KeyBanc Capital raised its stock price target to $340; a 37% increase from its current price.

Conclusion

Spotify’s ongoing expansion into the podcast space has proven to be costly, but it may be worth it in the long-run as its exclusive deals with podcast hosts and acquisition of podcasting services led to more promising 2021 second-quarter results, with a 23% increase in revenue and 22% user growth year-over-year, which came in much closer to forecasts than the first-quarter report. The recent buyback announcement and optimistic analyst rating may lead to a significant rebound in SPOT stock price, and given the current low price of the stock, now could be a good time to buy.

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