The stock market is abuzz with headlines so the indices are whipsawing from surprise headlines and tweets. Spotify (NYSE:SPOT) for example is down 15% this year. It may be time to start going long it even now.
Fundamentally, SPOT is not cheap. It still runs in the red and it sells at 87 times its book value. This at a time when multi-billion mega money centers like Citigroup (NYSE:C) are selling 0.75 their liquidation value.
So, going long here means believing that the stock market in general will allow for a frothy stock like SPOT to rally. This is not the same as saying it is a sell here. Every portfolio needs some speculation in it.
Spotify has a lot going for it. It is an early mover, so it has that advantage. The new hot trend is subscription income. The concept is old, but only recently has it gone mainstream. Mega-cap software companies realized it is better than the old ways of issuing hard copy machine-based versions and update them every so often. Piracy was rampant. Now with the advent of the cloud, they switched to SAS — software as a service. Amazon (NASDAQ:AMZN) web services is making most of this possible.
SPOT is already on board.
It delivers music content and users love it. Teens love it. I hear it in gyms, homes and office buildings. Most start their subscription for free. Once they are captive audiences, SPOT can migrate them up to pay subs. Netflix (NASDAQ:NFLX) proved that consumers are willing to pay a small fee for the freedom of receiving media content to their smart phones.
So that is a major hurdle that SPOT does not have to contend with. The prospect premium users are already conditioned to accept the offers. All SPOT management needs to do is find the right bait program. So it is a matter of marketing not concept.
The Spotify team has their wits about them. Just this week, one of the biggest IPO’s this year was TenCent Music Entertainment Group (NYSE:TME). This is the Spotify of China. The launch was a success given the current jittery market conditions. The tension between the U.S. and China is mounting from the contentious tariff war.
Nevertheless and in spite of that, the IPO was a success. The interesting part is that SPOT owns 9% of TME. So clearly, the team knows how to chase opportunities even when it would be in theory competition. This would be like NFLX investing in the Netflix of China. In essence, SPOT decided to benefit from the Chinese market indirectly and without the need for ground troops.
So Is It Time to Buy Spotify Stock?
The short answer is yes.
It is a good speculative stock to own as a long-term investment. But it is important to note that rarely do we get perfect entry points in stocks. So there could be lower entry points in the short term. Meaning that it may not turn out to be the ideal trade.
SPOT stock doesn’t trade in a vacuum. In addition to the stock-specific fundamentals, the price will move with the markets. And there I expect more volatility into the Federal Reserve rate decision next week. I am optimistic, but cautious as indices are teetering too closely to important necklines that if lost could launch another 15% correction from here.
Spotify is a recent issue, so there isn’t a lot of history to the chart. It moves fast, so momentum stocks are always scary to a lot of investors. It came out of the gate sprinting as it rallied 40%. Unfortunately, since, August Spotify stock corrected 35%. The SPOT chart, now is setting new lows. It is stuck in a nasty descending channel with no apparent stabilization. It may yet breach the recent $121 low in the short term.
So clearly this is not the time to go all into a frothy stock like this. But I am optimistic that the leaders of the U.S. and China will come to terms in the next 90 days. So it is safe enough to at least start to build a position into a long-term winner.
Volatility is high, so you shouldn’t risk more than you can afford to lose. Especially when the company is still this young.
Click here for more of my market thesis and get an ongoing free copy of my weekly newsletters. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.