Spotify Technology S.A. (SPOT) has surged by 153% this year, outpacing the industry, which has seen a 64% rise, and the Zacks S&P 500 composite, which increased by 26%.
Spotify’s Remarkable Rise: A Closer Look at SPOT’s Performance
Examining Year-to-Date Stock Growth
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Recently, SPOT closed at $475.24, just below its 52-week high of $489.69. The stock is currently trading above its 50-day moving average, a sign of strong investor confidence.
Current Trading Position Above 50-Day Average
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As SPOT maintains its upward momentum, investors might wonder if the stock still offers potential. Let’s dive into the details.
Analyzing Pricing Power and Growth
Spotify’s success stems from consistent price increases, a loyal user base, and notable cost-cutting measures. Remarkably, the company has managed to raise prices while still growing its subscriber count. In the third quarter of 2024, premium subscriber growth has consistently outpaced growth in ad-supported monthly active users (MAUs), demonstrating Spotify’s effective pricing approach.
The company generates about 88% of its revenue from premium subscriptions, with the remaining 12% from ad-supported models. Recent price hikes reflect a broader trend within the industry, as competitors like Alphabet‘s GOOGL YouTube Premium, Apple’s AAPL Music/TV, and Amazon’s AMZN Music Unlimited also increase their prices.
Additionally, Spotify is expanding its content offerings, particularly in the podcast and audiobook sectors. This growth in high-margin content could enhance profitability, especially as the company shifts its focus from merely attracting subscribers through content investments to monetizing these new offerings.
Historic Surge Boosts Stock Valuations
Spotify’s robust performance this year has driven a significant increase in its stock valuation. SPOT is currently trading at a forward 12-month P/E ratio of 55.21X, which is notably higher than the industry’s average of 40.07X. Its enterprise value/EBITDA ratio stands at 85.9X, much larger than the industry’s 52.87X, indicating that investors are paying a substantial premium. While there is optimism concerning growth, maintaining such high valuations may be difficult, risking a correction if results do not meet expectations.
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Revised Earnings Estimates
In the last 60 days, there have been four downward adjustments and two upward revisions for the fourth quarter earnings estimates. The Zacks Consensus Estimate for Q4 2024 earnings has decreased by 2.9% to $2.01. Over the same period, seven estimates for 2024 earnings have also been lowered, resulting in a consensus estimate drop of 4.7% to $6.02.
A Conservative Approach: Hold Strategy Recommended
The impressive rise in SPOT’s stock reflects its effective pricing strategies, increasing subscriber base, and profitability from high-margin initiatives like podcasts and audiobooks. However, the stock’s elevated valuation above industry norms suggests limited growth potential in the near term.
The recent downward revisions in earnings estimates for the fourth quarter and for 2024 signal challenges for the company in meeting high expectations. Given these considerations, a hold strategy may be wise, allowing investors to benefit from long-term growth while remaining cautious about any short-term risks linked to valuation.
SPOT currently holds a Zacks Rank #3 (Hold). You can view the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
