Spotify (NYSE:SPOT) stock surged on Monday, as the company announced a new agreement with Samsung (OTCMKTS:SSNLF).
Under the deal, Samsung will now bundle Spotify with Samsung Galaxy devices. This gives hope to the owners of Spotify stock, who have seen the equity trade in a range over its brief history.
However, despite the benefits this deal could bring, SPOT still faces serious threats. Some of the largest and best-positioned companies in tech are in the streaming-music space. As a result, it remains unclear how much the Samsung deal will boost Spotify stock. Given the daunting competitive challenges that SPOT is facing, I do not think the Samsung deal will be lucrative enough to warrant buying Spotify stock at its current levels.
The Samsung Deal Expands Spotify’s Moat
Under the terms of the deal, Samsung will preinstall Spotify’s app on all new Samsung phones sold in the U.S. Additionally, new Spotify customers who have bought certain Samsung devices—including the newly-released Galaxy S10—could qualify for six months of Spotify Premium service at no charge. SPOT stock rose by about 5% on Monday in the wake of the news.
Spotify’s relationship with Samsung began in August of last year, when Spotify became the “go to” music- provider for Samsung. The new arrangement expands that partnership.
With this bundle, Spotify has meaningfully enlarged its previously narrowing moat. SPOT will now become the preferred streaming media provider on about 24% of the smartphones sold in the U.S. Moreover, SPOT’s recent purchase of Gimlet Media and Anchor give it the ability to create its own content.
SPOT Stock Remains Pricey and It’s Still Facing Threats
For all of the merits of Spotify, it must contend with Sirius (NASDAQ:SIRI), which owns Pandora Radio and has a comparable market cap. Also, the $26 billion market cap of SPOT stock pales in comparison to the market caps of other players in the music-streaming space such as Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), and Amazon (NASDAQ:AMZN).
Given these challenges, Spotify stock appears to be priced for perfection. While encouraging, the company’s recent moves do little beyond ensuring its survival.
Spotify may end up developing compelling content. Still, I do not think we can assume that this will enable Spotify to become the Netflix (NASDAQ:NFLX) of audio content.
It also remains unclear if a significant portion of the Samsung customers who will receive Spotify’s Premium service for free will keep it after they have to start paying for it.
From a valuation perspective, Spotify stock also appears to be pricey. SPOT stock trades at 4.3 times its sales and 14 times its book value. Also, even the more optimistic analysts do not expect SPOT to generate an annual profit before next year. I think the Samsung deal gives the owners of Spotify stock an incentive not to sell their shares. However, the stock’s current metrics indicate that SPOT has not become a “buy” either.
Moreover, the history of SPOT stock isn’t very encouraging. The firm launched the IPO of Spotify stock in April of last year. Since then, the stock has remained range-bound. Today’s price of around $144 per share leaves SPOT in the middle of that range. It also leaves the equity below $149.60 per share, its closing price after the first day of trading in 2018.
Concluding Thoughts on Spotify Stock
Even after the Samsung deal, concerns over valuation and competition will continue to weigh on Spotify stock. Competition from the likes of Apple and Google are likely to kill a company like SPOT. Improving technology and interest by tech’s most significant players leave little room for a smaller company which only offers streaming music.
Both the Samsung deal and Spotify’s recent creative efforts will help keep it relevant. However, investors have already priced this pertinence into Spotify stock, perhaps many times over. The deal may boost Spotify’s overall outlook, but I do not think it will do much for the owners of SPOT stock in the long-run.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
