Spotify Technology S.A. (SPOT) has been on a roll, with its stock skyrocketing 83% year-to-date, far outpacing the industry’s 23.4% rally. The stock recently closed at $343.97, nearing its 52-week high of $359.38. This bullish trend is reflected in SPOT trading above its 50-day moving average, signaling strong investor confidence.
Given this impressive performance, investors are naturally curious if there’s still room for growth in SPOT. Let’s delve deeper into Spotify’s success and explore the potential for future appreciation.
Spotify’s stellar financial results stem from a combination of factors, including:
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Price Hikes:
Spotify has successfully implemented price increases, demonstrating its ability to retain and expand its subscriber base while boosting revenue. This strategy has been mirrored by competitors like Alphabet’s YouTube Premium, Apple’s Music/TV, and Amazon’s Music Unlimited, indicating an industry-wide shift towards higher pricing.*
Podcast Gains:
Spotify is actively expanding its content portfolio, aiming to generate a larger portion of its revenue from podcasts and audiobooks. This high-margin content initiative has the potential to enhance profitability, even as negotiations with record labels become more challenging.*
Profitable Podcasts:
Spotify is leveraging its video podcast platform, with over 250,000 shows and 170 million users actively engaging with video podcasts. This shift in strategy from prioritizing subscriber growth to monetization is driving podcast profitability.*
Loyal User Base:
Spotify benefits from a loyal user base that continues to subscribe to its premium services. This loyalty has played a crucial role in the company’s revenue growth.*
Significant Cost Reductions:
Spotify has implemented cost reduction measures, further contributing to its improved financial performance.Despite the impressive rally, Spotify’s stock remains undervalued compared to its peers. The trailing 12-month price/sales ratio of 4.53X is significantly lower than the industry average of 8.76X. Similarly, the trailing 12-month enterprise value/sales ratio stands at 3.95X, compared to the industry average of 8.44X. The Relative Strength Index, a measure of overbought conditions, shows no significant signs of overextension, indicating potential for further appreciation.
Spotify’s financial stability is further reinforced by its robust liquidity position, reflected in a current ratio of 1.56 at the end of the second quarter of 2024, exceeding the industry average of 1.02. This strong liquidity demonstrates Spotify’s ability to cover its immediate liabilities without strain, indicating financial resilience and flexibility.
Analyst confidence in Spotify’s future is evident in the upward trend of earnings estimates. Over the past 60 days, seven estimates for the third quarter of 2024 have been revised upwards, with no downward revisions. The Zacks Consensus Estimate for third-quarter 2024 earnings has increased 32.6% to $1.83, representing a 408.3% year-over-year growth. Similarly, for the full year 2024, eight estimates have been revised upwards with no downward revisions, leading to a 26.2% increase in the consensus estimate to $6.31, indicating a projected 313.9% year-over-year growth.
The Zacks Consensus Estimate for SPOT’s third-quarter 2024 sales stands at $4.38 billion, signifying a 19.8% year-over-year increase. For the full year 2024, revenues are expected to increase 19.4% year over year.
Spotify’s solid fundamentals, undervaluation, and positive momentum make it a compelling investment opportunity for those seeking to capitalize on the growing music streaming and podcasting markets. The company’s management anticipates continued growth in the third quarter, projecting a 13 million increase in total MAUs, a 5 million increase in premium subscribers, a $193 million revenue boost, a 100 basis point expansion in gross margin, and a $139 million increase in operating income.
With its impressive track record, strong fundamentals, and bullish outlook, Spotify is well-positioned to solidify its market leadership. Now is an opportune time to consider investing in SPOT before further appreciation further reinforces its dominance in the music streaming and podcasting industries.
