Shares of Spotify (NYSE:SPOT) have been struggling since its IPO in early 2018. SPOT stock continues to trade sideways and consolidate even with the overall market heading higher. Spotify stock is now below the opening price from when it went public last April. The move away from streaming and towards podcasts is starting to reap benefits, though. Time to be a buyer of SPOT on any weakness.
Fortune even contended back in May 2018 that Spotify has a broken business model and will never be profitable. Despite reporting its first operating profit in 13 years last February, some analysts have been skeptical that significant returns will ever come.
However, after the company’s recent implementation of significant operational changes, SPOT stock now represents a bargain at just under $130 a share.
I’m not buying into the arguments of streaming enthusiasts like New York University’s Larry Miller. He recently suggested to CNBC that streamers will bankrupt the radio industry within a decade. Most traders know that music streaming is not very profitable, at least on its own, and that streaming services like Spotify would be wise to embrace some of the same attributes of the radio industry, which draw the vast majority of audio listening to local radio stations.
Spotify Stock Chart
That is exactly why I believe now is an ideal time to buy shares of Spotify. SPOT analyzed the long-term success of radio and other businesses connected to music. It then shifted away from its exclusive music focus and towards a more sustainable business model. Its focus on building a loyal customer base is beginning to pay off.
SPOT is also looking attractive on a technical basis. Spotify stock reached oversold levels on a nine-day relative strength index basis before strengthening. The moving average convergence/divergence also reached an extreme and has since headed higher. Bollinger Percent B was negative and now has reversed to turn positive. There is major long-term support at $120. SPOT stock is also at a big discount to the 20-day moving average which has led to a pop in the past.
Just weeks ago, one year after radio giant iHeartMedia (NASDAQ:IHRT) acquired podcasting pioneer Stuff Media, Spotify unveiled Spotify for Podcasters, an interface that will greatly increase the number of show series on the Spotify app. This follows the move earlier by SPOT to delve further into podcasting. Spotify acquired podcast industry giants like Gimlet Media, Anchor and Parcast to further this initiative.
SPOT Stock and Podcast Profitability
This shift to podcasting should soon have positive effects for profitability, and ultimately, SPOT stock. Believe it or not, the radio industry still reaches more Americans (93%) than any other platform. This has less to do with music and more to do with the wide, loyal following brought about by the connection between host and listener. SPOT is looking to capitalize on this connection via podcasts.
The Washington Times recently underscored this point by using the example of Casey Kasem and his renowned “American Top 40” syndicated radio program. Despite Kasem having not been live on the air for years, thousands of people still tune into the re-run tapings. According to The Washington Times, the reason is because, “while they can listen to their favorite oldies anywhere …there’s only one place they can get Casey.”
Without those clear connections, streamers haven’t managed to create a loyal listener base, and advertisers have thus stuck with radio over streaming. Advertisers can also target a specific base via podcasts –a decided plus.
The Bottom Line
Spotify has acknowledged that it must embrace what has already proven to be effective. This is why they created Spotify for Podcasters and acquired podcasting giants. The numbers already suggest the move is effective. Its total subscribers and monthly active users grew by 31% and 29%, respectively, as its quarter-over-quarter podcast growth increased by over 50% according to the latest earnings report.
Slowly but surely, podcasting is giving Spotify the community feeling that has been prevalent in radio but missing in streaming for the past 13 years. That’s a good thing for long-term success. Analysts seem to agree, with an average price target of $170.07 per share. Investors can remain ahead of the curve by adding SPOT stock to their portfolio near current levels.
Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility.