Spotify (NYSE:SPOT) stock started off 2019 red-hot, as the music-streaming giant gained momentum amid improving economic and financial market conditions. Spotify stock rose more than 30% through the first two and a half months of 2019. Then, the rally hit a wall in late February amid rising competition concerns.
The concerns were sparked by a number of factors. The Wall Street Journal reported that Apple’s (NASDAQ:AAPL) Apple Music had more U.S. paid streaming subs than Spotify and was growing faster. Amazon (NASDAQ:AMZN) did a soft launch of a free streaming tier of Amazon Music. Moreover, Barron’s came out with a scathing article on Spotify, basically saying that the company needs to become the Netflix (NASDAQ:NFLX) of music in order to justify its valuation, and Sirius XM (NASDAQ:SIRI) rolled out a music-streaming-only subscription plan at below-market prices.
All in all, the news flow related to Spotify stock has turned sharply negative over the past two months. Consequently, Spotify stock has dropped roughly 10% during that stretch.
Spotify’s Earnings Will Have a Major Impact on Spotify Stock
SPOT’s earnings are due to be released on Monday, April 29. This report is important. It will either confirm recent competition concerns or put them to rest, consequently causing Spotify stock to either drop or pop.
I think the numbers will put the competition concerns to rest and cause Spotify stock to pop. Although competition in this space is building, SPOT has a big lead, is making the right moves to preserve its lead, and has benefited from some international growth catalysts over the past few months which should positively impact its results. As a result, I think the earnings report should be good, sparking a rally by SPOT stock.
The Competition Won’t Affect the Numbers
Spotify stock has been hurt by competition concerns over the past few months, but those competition concerns likely won’t impact the company’s first -quarter numbers.
That’s because these concerns aren’t new. Apple Music has reportedly been bigger than Spotify in the U.S. since mid-2018, so that isn’t exactly revolutionary news.
Meanwhile, Amazon Music has been around for a while, and it’s hardly made a dent on Spotify’s growth trajectory. Sure, the new free tier may do some damage, although it probably won’t. But the new tier didn’t launch until April, and the service was only made available to U.S. customers with an Alexa-enabled device. Thus, the impact on SPOT’s first-quarter numbers and second-quarter guidance will be muted. The same is true of the new Sirius XM streaming offering, which launched in April.
Overall, then, all these competition concerns that have weighed on Spotify stock won’t show up in the company’s first quarter numbers or its second-quarter guidance. But two other things will impact its results.
One, Spotify launched in India during the quarter, and had a big debut there, attracting 1 million users in its first week. Two, Spotify has doubled down on original podcasts, and Google Trends indicate that global interest related to these podcasts is building.
So SPOT’s numbers should be pretty good. They will reflect international strength and investments in original content, not heightened competition.
The Long-Term Outlook of Spotify Stock Is Bright
Spotify is doing everything possible to ensure that it does become the Netflix of music.
Most importantly, the company is investing in original content. Today, it’s original podcasts and playlists. Tomorrow, it might be original songs and albums. Regardless, the company is leveraging its size, resources, and unprecedented listener data to produce quality original content which will get customers to stick to the service, regardless of how the competition looks.
Also,SPOT continues to leverage social networks to enhance its stickiness. For instance, it has made a partnership deal with Instagram which allows Spotify’s songs to be put into Instagram Stories. SPOT is also innovating its ad technology to build a moat against ad competition, and testing out new subscription bundles to appeal to different crowds.
Given SPOT’s effective strategies, I think SPOT remains on track to get nearly 300 million paying subs by 2025.As a result, I think that Spotify stock should trade close to $170 by the end of the year.
The Bottom Line on SPOT Stock
Spotify stock was a big winner in early 2019, and it should get back to its winning ways following what will likely be a strong first-quarter earnings report that will put concerns about its competition to rest.
As of this writing, Luke Lango was long SPOT, AAPL, AMZN, NFLX, and SIRI.