Spotify Technology S.A. (NYSE:SPOT) has experienced a remarkable run over the past year, with its stock soaring by 150%. This impressive performance has outpaced major tech giants like Meta, Amazon, and Apple, making it a standout in the streaming sector. As Spotify’s valuation improves and its business model continues to evolve, this “Spotify Stock Analysis” delves into whether now is the right time to buy.

Spotify’s Market Leadership and Competitive Edge

Spotify has long been a pioneer in the streaming music industry, fundamentally altering how people consume music, much like how Netflix transformed the movie and TV industry. Despite facing intense competition from tech behemoths like Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), and Alphabet’s YouTube (NASDAQ:GOOGL), Spotify remains the dominant player, holding a 32% share of the global streaming music market as of 2023. In comparison, Apple Music holds 15%, YouTube has 14%, and Amazon Music trails with 13%.

Spotify’s success is built on its ability to continually attract and retain users. The platform has expanded beyond music to include podcasts and, more recently, audiobooks, making it a comprehensive audio streaming service. Between Q2 FY20 and Q2 FY24, Spotify’s Premium Subscribers grew by 80%, while monthly active users (MAUs) surged by 110%. By 2028, some Wall Street estimates suggest Spotify could reach 900 million MAUs, representing a 45% increase from current levels.

Revenue Growth and Price Hikes Fuel Profit Expansion

Spotify’s ability to grow its user base is critical in negotiating favorable rights deals with artists, which in turn drives profitability. The company has successfully implemented price hikes in consecutive summers, raising its ad-free Premium plan prices to match competitors like Apple and Amazon. These price increases, combined with user growth, have led to significant earnings expansion.

Higher interest rates have prompted Spotify to focus on efficiency and profitability, similar to other tech firms like Amazon. Spotify has streamlined its operations, including workforce reductions, to improve its bottom line. These efforts have begun to bear fruit, as evidenced by the company’s recent financial performance.

Spotify’s Strong Q2 Results and Growth Outlook

Spotify’s Q2 FY24 results showcased the company’s ability to drive profitability. The company reported a record gross margin of 29.2%, a 510-basis point improvement year-over-year. Free cash flow expanded to €490 million in Q2, up from €207 million in Q1 2024 and just €9 million in the year-ago period. These figures highlight Spotify’s transition to a more profitable and cash-generating business model.

In Q2, Spotify grew its MAUs by 14% year-over-year to 626 million, while Premium Subscribers increased by 12% to 246 million. Revenue also grew by 18%, and the company swung from an adjusted loss of -$1.69 per share in the year-ago period to a positive $1.43 per share, surpassing earnings estimates by 32%.

Spotify’s growth outlook remains robust, with FY24 EPS estimates surging by 27% since its Q2 release. The company’s FY25 EPS estimate has also increased by 21%. Over the past 12 months, Spotify’s FY24 EPS estimate has skyrocketed by 940%, from $0.61 per share to its current $6.32, while its FY25 estimate has grown by 280%.

Technical Performance and Valuation

Spotify’s stock has soared 350% from its 2022 lows, including an 80% year-to-date gain. Despite this impressive run, the stock still trades around 8% below its 2021 peaks and 9% under its average price target. This suggests that there could be further room for growth if the company continues its momentum.

From a valuation perspective, Spotify trades at a 75% discount to its 12-month highs at 42.9X forward 12-month earnings. The company’s PEG ratio, which factors in long-term earnings growth, reflects a 60% discount to the broader Tech sector. Additionally, Spotify’s stock trades at a 43% discount to the Tech sector on a forward sales basis, indicating that it may still be undervalued despite its recent gains.

Conclusion: Is Spotify Stock a Buy?

Spotify’s ability to continually innovate and grow its user base, combined with its improving profitability, makes it a compelling investment opportunity. The company’s valuation has become more attractive as its earnings and cash flow expand, suggesting that now may be a good time to consider buying Spotify stock as it aims for new all-time highs.

Featured Image: Freepik

Please See Disclaimer