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Spot a Bright Tomorrow with SPOT Stock

Stock MarketsSep 20, 2021 08:30AM ET
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© Reuters. Spot a Bright Tomorrow with SPOT Stock

Spotify Technology SA (NYSE:SPOT) is a Europe-based audio streaming service provider. It is the world’s most popular music streaming application, with over 350 million users and more than 165 million paid subscribers. Recently, the company has been making headlines for all the right reasons, with SPOT stock trading 20% higher over the past month.

Of course, Spotify remains well off its all-time highs of $387.44, trading approximately 35% below this level. That said, I remain bullish on the ability of SPOT stock to return to these levels. Let's dive into a few catalysts that could take this company on a nice ride.

(See Spotify Technology SA stock charts on TipRanks)

The Buyback Announcement

On Aug. 20, Spotify announced that its top brass was on board with a share repurchase program worth $1 billion. This buyback is expected to be carried out over time, over the next five years.

While perhaps not necessarily a surprise, this buyback announcement does boost growth investors' outlook for SPOT stock. Any buyback ensures that a given company's share count continues to decline (or at least stays stable if the company allows for a DRIP or provides share-based compensation).

Spotify's previous $1 billion share repurchase, announced in November 2018, has concluded as of April this year. Investors bullish on another leg of buybacks have gotten what they were looking for with Spotify.

Now, some investors may argue that Spotify would better serve investors by foregoing this buyback. After all, this is growth capital that could be reinvested in the business. While some investors may like the fact that Spotify is returning value to shareholders, others may look at this announcement as a negative.

That said, there's reason to believe Spotify is doing this share repurchase program because it feels it has ample liquidity to accomplish all its goals. Additionally, this buyback is relatively small, in that it represents approximately 2.5% of Spotify’s market cap.

Indeed, given the sharp decline in SPOT stock, perhaps management felt like now was the time to reassure long-term investors. Whatever the case, this announcement is a broadly bullish catalyst for those looking to hold onto a growth stock in this current environment.

Other Catalysts for SPOT Stock

During Spotify's Q4 earnings call, CEO Daniel Ek informed investors that the company might dial down its M&A efforts moving forward. This would allow the company's management team to streamline investments in Spotify's production resources, including the various studios Spotify acquired recently.

Specifically, Spotify has been making large investments in its podcast business in recent years. Among the key areas of focus for Spotify will be its Ringer, Gimlet, and Parcast portfolio assets. Additionally, the company will be looking to leverage its exclusive contracts with various podcast personalities, as well as seting up its own podcast studio – Spotify Studios.

In fact, the company also bought Megaphone and Anchor - two podcast distribution companies - for $365 million. These, along with Spotify's core business, will be core revenue generators for advertisers across the company's portfolio of platforms, courtesy of the Spotify Audience Network. The cherry on top is that while this is currently only available in the U.S.A., Spotify plans on going global with its ambitions in this space.

Indeed, there's room for investors to be bullish on Spotify's potential for revenue growth in its advertising segment. The days of Spotify reporting only 10% of its revenues from advertising are likely over.

Additionally, there remains a tremendous amount of growth potential for the company's podcast business to grow on the top and bottom lines. Should Spotify be able to monetize this business well, it's expected revenue could continue to grow organically at a 200% year-over-year clip for some time.

Indeed, Spotify is a company with excellent earnings and growth potential over the long-term. Investors simply need to look further into the future to realize this potential.

Spotify Earnings Solid

From an earnings perspective, Spotify has shown impressive growth across most of its lines of business. This growth has propelled SPOT stock to trade at a rather high multiple of around 17-times trailing sales.

That said, Spotify closed its most recent quarter with just over $3.63 billion in cash and cash equivalents, short-term investments, and restricted cash. This means the company is well-capitalized and is unlikely to need financing any time soon. Cash flows are positive, and the company appears to be headed in the right direction, on the bottom line.

Additionally, it appears Spotify is making headway with growing its margins. The company could potentially bypass the 30% subscription commission it pays to Apple (NASDAQ:AAPL) by launching its direct payment platform. This will not only be better for margins, but also for customer service, moving forward. Investors have a lot to like about this strategic move.

On the subscriber growth side, analysts expect to see 22 million subscribers added this year, while YouTube (as a comparison) is expected to add "only" 15 million over this period. Accordingly, Spotify's valuation appears to be justified in this era of incredible valuations.

What are Analysts Saying about SPOT Stock?

As per TipRanks' analyst rating consensus, Spotify is a Moderate Buy. Out of 15 analyst ratings, there are 9 Buy recommendations, 4 Hold recommendations, and 2 Sell recommendations.

This stock has an average Spotify price target of $293.73. Analyst price targets range from a high of $428 per share to a low of $170 per share.

Bottom Line

Spotify's recent earnings numbers and buyback plan present an intriguing growth case to consider SPOT stock right now. Indeed, this stock isn't cheap. However, in today's market, investors need to pay for quality.

It appears the market has discounted Spotify's growth relative to the premiums investors were willing to pay earlier this year. However, those seeking top-notch growth may want to keep SPOT stock on the watch list for now.

Disclosure: At the time of publication, Chris MacDonald did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.

Spot a Bright Tomorrow with SPOT Stock
 

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