Spotify Technology (SPOT) leads in the streaming music race, keeping rivals like Apple at bay. Revenue and subscriber growth have been strong, but profits have been elusive. Still, many investors are wondering, is SPOT stock a buy right now?
Based in Stockholm, Spotify launched in 2008 at a time when music fans were purchasing and downloading individual songs and albums. Spotify pushed the idea that music lovers could pay a flat monthly subscription fee to have access to a vast library of content. SPOT stock went public in April 2018.
Spotify currently leads the industry with 144 million paying subscribers worldwide, as of Sept. 30. It also has 185 million users of its advertising-supported service tier. On a year-over-year basis, premium subscriptions rose 27% in the third quarter, while ad-supported listeners climbed 31%.
Its success has attracted a bunch of competitors. Spotify’s top rival is Apple (AAPL), which led the last shift in music consumption from physical media to digital downloads through its iTunes online store.
Spotify Fends Off Rival Services
Apple Music has an estimated 82 million subscribers, according to Loup Ventures. It doesn’t have a free, ad-supported tier like Spotify. Apple does not typically release subscriber numbers for its services.
Other competitors include e-commerce leader Amazon.com (AMZN), Alphabet‘s (GOOGL) YouTube Music, and Sirius XM Holdings (SIRI), which also owns Pandora. Additional players in the market are Tencent Music (TME), Deezer and U.S. radio station giant iHeartMedia (IHRT).
Spotify offers service in 92 countries and territories. On Dec. 17, it announced plans to launch service in South Korea in the first half of 2021. SPOT stock rose 3% on the news.
In the third quarter, Europe accounted for 40% of Spotify’s subscribers. North America brought in 29% of its subscribers, followed by Latin America at 21%. The rest of the world accounted for 10%.
Spotify’s standard subscription plan is $9.99 a month for unlimited, commercial-free music streams. That’s on par with rival services. Spotify offers over 60 million music tracks to its users.
The company’s average revenue per user has been declining because of lower-priced student and family plans as well as cheaper plans for developing markets.
Spotify Stock News: Shift To Podcasting
To differentiate from streaming music services that offer basically the same catalog, Spotify has diversified into podcasting. It now offers over 1.9 million podcasts. The company has made several acquisitions to bulk up its podcasting capabilities. In 2019, it bought Gimlet Media, Anchor and Parcast.
In the first quarter, it purchased The Ringer, a creator of sports, entertainment and pop culture podcasts. Spotify paid upward of $195 million for The Ringer.
On May 19, Spotify announced an exclusive multiyear licensing deal to carry “The Joe Rogan Experience” podcast on its service. SPOT stock rocketed on the news. One of the most popular podcasts in the world, “The Joe Rogan Experience” debuted on Spotify on Sept. 1.
On Nov. 10, Spotify announced an agreement to acquire Megaphone, a podcast advertising and publishing platform. The deal is valued at $235 million, according to media and analyst reports.
SPOT Stock Valuation Questioned
Lately, some Wall Street analysts have questioned the valuation of Spotify stock, given its runup over enthusiasm for the company’s podcasting initiatives.
On Dec. 15, Credit Suisse analyst Brian Russo downgraded Spotify stock to neutral from outperform. But he kept his price target at 315. He said the near-term benefits of Spotify’s podcasting business were already priced into SPOT stock.
On Dec. 18, Wells Fargo analyst Steven Cahall reiterated his underweight rating on SPOT stock with a price target of 200.
“While we believe Spotify’s a great company, we remain bearish on long-term margins,” he said in a note to clients. “It’s hard to make good margins when most of the content is shared by competitors, and podcast investments are in early innings of ROI (return on investment).”
However, other analysts remain bullish on the audio entertainment streaming leader.
On Dec. 30, Monness Crespi Hardt analyst Brian Write raised his price target on Spotify stock to 380 from 310. He kept his buy rating.
“After battling lackluster investor sentiment in 2018 and 2019, the Spotify story came to life in 2020 as its podcast push gained momentum and the value of the platform became better appreciated, resulting in a reinvigorated stock,” White said in a note to clients. “We believe Spotify has further upside.”
Spotify Stock Fundamental Analysis
In the third quarter, Spotify added more subscribers than expected but came up short on sales and earnings. SPOT stock sank 3.4% on Oct. 29 after the company’s earnings report.
Spotify lost the equivalent of 68 cents a share on sales of $2.31 billion in the September quarter. Spotify reports financial results in euros. Analysts expected Spotify to lose 61 cents a share on sales of $2.36 billion. In the year-earlier quarter, Spotify earnings were 40 cents a share on sales of $1.93 billion.
Spotify added 6 million new paying subscribers in the third quarter. It had forecast adding 4 million subscribers and Wall Street was looking for 5 million new subscribers.
For the current quarter, Spotify expects to lose $84 million on sales of $2.46 billion. Analysts were modeling Spotify to lose $103 million on sales of $2.56 billion in the fourth quarter.
Spotify’s gross profit margin ticked down to 24.8% in the third quarter. That compares with 25.4% in the second quarter and 25.5% in the year-earlier period.
A knock on streaming music companies is that it’s tough for them to make a profit because of high royalty rates owed to music publishers.
Rivals like Amazon and Apple can operate their streaming music services at near break-even levels or even as loss leaders. As a “pure play” in the space, Spotify doesn’t have that ability.
SPOT Stock Technical Analysis
Spotify stock began trading on April 3, 2018, at 165.90. SPOT stock climbed as high as 198.99 on July 26, 2018, before taking an extended swoon.
On April 29, SPOT stock attempted a breakout from a double-bottom base with a buy point of 160.08, according to IBD MarketSmith charts. It rose as high as 163.94 intraday. But Spotify stock reversed and triggered a stop-loss sell rule the next day.
But SPOT stock rallied after the company announced its deal to carry the Rogan podcast.
On Dec. 29, Spotify stock ended the regular session at 318.43.
Spotify stock has a subpar IBD Composite Rating of 44 out of a best-possible 99, according to the IBD Stock Checkup tool. IBD’s Composite Rating combines five separate proprietary ratings into one easy-to-use rating. The best growth stocks have a Composite Rating of 90 or better.
Is Spotify Stock A Buy Right Now?
Spotify stock is not a buy right now.
On Dec. 2, SPOT stock broke out of an 18-week consolidation period at a buy point of 299.77, according to IBD MarketSmith charts. It ended the session above the 5% chase zone of its breakout. SPOT stock notched an all-time high of 346.44 on Dec. 11. It remains extended beyond the buy zone.
Spotify stock has an IBD Relative Strength Rating of 89. That means it has outperformed 89% of stocks over the past 12 months. The best growth stocks typically have RS Ratings of at least 80.
However, Spotify is missing some aspects that make a great CAN SLIM stock. Most importantly, it’s not consistently profitable. So, it doesn’t have the earnings growth that CAN SLIM investors seek.
On the plus side, SPOT stock is a leader in its industry segment. It’s also participating in a paradigm shift in the entertainment industry, with music going from downloads to streaming.
Futuresource Consulting predicts that the number of streaming subscriptions will exceed 425 million globally by 2023, up from 235 million at the end of 2018.
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Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
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