Spotify’s Stock Surge: Time to Sell or Stay the Course?
Spotify Technology S.A. (SPOT) has experienced an impressive stock increase of 98.2% year-to-date, surpassing the industry average of 33.5%.
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In the latest trading session, Spotify’s stock closed at $372.50, not far from its 52-week high of $389.23. Currently, SPOT is trading above its 50-day moving average, which suggests a positive outlook among investors.
SPOT Stock Shows Strong Momentum
As SPOT shares continue to strengthen, many investors might be questioning whether it’s still worth investing in this stock. Let’s delve into the details.
Robust Growth Fueling SPOT’s Success
Investors in Spotify have numerous reasons to feel optimistic about the company’s financial health. In the second quarter of 2024, the number of premium subscribers grew by 12%, and ad-supported monthly active users (MAUs) increased by 15%. Overall, total MAUs rose by 14% year over year. Spotify’s gross profit surged by 45% compared to the previous year, and its gross margin expanded by 510 basis points. Notably, the company shifted from an operating loss of $247 million to a profit of $266 million, and the adjusted earnings per share (EPS) of $1.43 marked an impressive 184.6% year-over-year increase.
This strong performance has been supported by price increases, a dedicated user base, and significant cost reductions. The success of Spotify’s pricing strategy is particularly noteworthy, as this quarter marked the first time premium subscriber growth outpaced the growth of ad-supported MAUs.
Recent price hikes, including those from competitors like Alphabet (GOOGL) with YouTube Premium, Apple (AAPL) with Music/TV, and Amazon (AMZN) with Music Unlimited, reflect a broader trend towards elevated prices in the industry.
As Spotify continues to expand its offerings, it aims to derive an increasing portion of its revenue from podcasts and audiobooks. By enhancing profits through these high-margin initiatives, Spotify can improve its overall financial situation, even in a tougher negotiation environment with record labels. The profitability of podcasts is growing too, shifting the company’s strategy from primarily boosting subscriptions to focusing on monetization.
By the second quarter of 2024, Spotify has over 250,000 video podcast shows, with more than 170 million users having engaged with video podcasts on its platform.
After achieving a significant legal victory in the EU, Spotify has eased competitive pressures from Apple, allowing it to expand its market share further. Additionally, the recent closure of TikTok Music could present further opportunities for Spotify.
Valuation Concerns Following SPOT’s Price Surge
Spotify’s stellar performance in 2024 and market share gains have led to a notable increase in its stock valuation. Currently, Spotify trades at a trailing 12-month price-to-earnings (P/E) ratio of 45.53X, which is higher than the industry average of 38.03X. Additionally, its enterprise value/EBITDA ratio stands at 121.19X, more than double the industry standard of 54.58X. These statistics suggest that investors are paying a premium for Spotify shares. Yet, maintaining such high valuations may prove challenging, raising the possibility of a price correction should growth not align with expectations.
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Downward Adjustments in Earnings Estimates
In the past 60 days, one estimate for the third quarter of 2024 has downgraded, while there have been no upward revisions. Conversely, the Zacks Consensus Estimate for third-quarter 2024 earnings has risen by 2% to $1.79. Furthermore, one estimate for 2024 has also moved downward during this period, against no upward revisions. However, the consensus estimate for 2024 earnings has increased by 2% to $6.24.
Final Recommendation: Consider Selling
Given the rapid increase in stock price, Spotify’s valuations have reached elevated levels. Keeping such high multiples might be difficult, suggesting a greater chance of a correction if the company’s growth does not meet projections.
For those who have held SPOT for a significant period, now might be the time to take profits, as declining earnings projections present a riskier outlook. Potential investors are likely better off avoiding SPOT at this moment.
Currently, SPOT holds a Zacks Rank #4 (Sell). You can check 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.
