Based in Luxembourg, Spotify Technology S.A. (SPOT) is a leading music streaming services provider that offers roughly 70 million tracks to millions of consumers in more than 178 countries and territories. Along with strengthening its podcast offerings, the company launched Spotify Greenroom in June 2021, borrowing a page from the famous audio-chat app Clubhouse. Also, the Swedish audiobook streaming group Storytel partnered with SPOT in May 2021.

However, the stock has lost 30.9% in price year-to-date and 18.8% over the past month to close yesterday’s trading session at $217.42. In addition, it has declined 8.6% since reporting its second-quarter earnings results on July 28, due primarily to less-than-expected monthly active user (MAU) growth. Furthermore, SPOT continues to face COVID-19 pandemic-related headwinds. As a result, it has provided moderate guidance for the coming quarters.

Its total revenue is expected to be between €2.31 billion ($2.74 billion) and €2.51 billion ($2.98 billion) in the third quarter and between €2.48 billion ($2.94 billion) and €2.68 billion ($3.18 billion) in the fourth quarter. Its MAUs are expected to be between 377 million and 382 million in the third quarter, and between 400 million and 407 million in the fourth quarter.

Here are the factors that we think could influence SPOT’s performance in the coming months:

Increased Focus on Podcasts

Home to the popular podcasts The Joe Rogan Experience and Bill Simmons’ The Ringer, SPOT signed a deal in May 2021 to stream Dax Shepard’s popular podcast Armchair Expert exclusively. The company also announced a multi-year agreement in June 2021 to stream the popular podcast Call Her Daddy, hosted by Alex Cooper, on its audio streaming platform. Also, on June 18, SPOT acquired Podz, a startup that is trying to solve the problem of podcast discovery.

Daniel Ek, the company’s founder and CEO, said in an earnings call on July 28, “And looking at podcasts, podcast revenue was up over 627% year over year or nearly 200% on an organic basis. The continued outperformance is currently limited only by the availability of our inventory, which is something we are actively solving for.” Also, according to an eMarketer report, podcasts are expected to account for 20% of the time spent on digital audio this year and 25% in 2023. So, SPOT will likely benefit from its increased spending on podcasts.

Mixed Financials

SPOT’s revenue from its premium segment came in at €2.06 billion ($2.44 billion) for the second quarter, ended June 30, 2021, up 17% year-over-year, while its revenue from the ad-supported segment increased 110% year-over-year to €275 million ($326.03 million). The company’s net loss for the quarter declined 94.4% year-over-year to €20 million ($23.71 million), and its loss per share decreased 90.1% year-over-year to €0.19 ($0.23).

However, SPOT’s total MAUs, one of the most critical metrics, came in at 365 million in the quarter, which was below its guidance range and forecast. This less-than-expected MAU was due primarily to ongoing uncertainties around the pandemic and the uneven recovery from it worldwide. Furthermore,  the company’s total liabilities were €4.78 billion ($5.67 billion) in the second quarter versus €3.52 billion ($4.17 billion) for the quarter ended December 31, 2020.

Stretched Valuation

In terms of forward EV/S, SPOT’s 3.56x is 34.8% higher than the 2.64x industry average. Likewise, the stock’s 1,830.30x forward EV/EBITDA is significantly higher than the 10.46x industry average. Moreover, its forward P/S and P/B of 3.68x and 13.12x, respectively, are higher than the 1.78x and 2.88x industry averages.

POWR Ratings Reflect Uncertain Near-Term Prospects

SPOT has an overall C rating, which equates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. SPOT has a C grade for Momentum, which is in sync with its 9.5% loss over the past three months and 18.8% loss over the past month. The stock has a C grade for Value too, which is consistent with its higher-than-industry valuation ratios.

SPOT’s lower-than-industry profitability ratios led to a D grade for Quality. In terms of trailing-12-month gross profit margin, SPOT’s 26.39% is 47% lower than the 49.83% industry average. Also, its trailing-12-month ROCE and ROTA are negative compared to the 6.71% and 2.21% respective industry averages.

Out of the seven stocks in the Entertainment – Radio industry, SPOT is ranked #6. Click here to see SPOT’s ratings for Growth, Stability, and Sentiment as well.

Better than SPOT: Click here to access two top-rated stocks in the same industry.

Bottom Line

SPOT has been making several positive developments on the podcast front while expanding its offerings in other areas. However, the company continues to be impacted by COVID-19 pandemic headwinds. In addition, it faces intense competition from other players in the streaming space, such as Apple Inc.’s (AAPL) Apple Music and Amazon.com, Inc.’s (AMZN) Amazon Music. Also, analysts expect SPOT’s EPS to remain negative in the coming quarters. So, its sky-high valuation looks unjustified now, and we think it is wise to wait for a better entry point in the stock.

SPOT shares were trading at $218.80 per share on Thursday morning, up $1.38 (+0.63%). Year-to-date, SPOT has declined -30.46%, versus a 18.67% rise in the benchmark S&P 500 index during the same period.

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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