It May Be Time to Start Buying the Dip in Spotify Stock

In July, Spotify (NYSE:SPOT) stock was flying high towards $300 on the back of robust optimism that the music streaming platform was leveraging a strong original podcast strategy to turn into the Netflix (NASDAQ:NFLX) of music.

Spotify (SPOT) logo is on the screen of a smartphone with headphones plugged in.
Source: Kaspars Grinvalds / Shutterstock.com

While I largely subscribed to that bull thesis, I also said back then that SPOT stock — which ostensibly could do no wrong — was aggressively overvalued.

Since then, SPOT stock has tumbled lower by about 20%. And guess what? That aggressive overvaluation which kept me from being bullish on the stock back in July, no longer exists. That is, SPOT stock today is now fairly valued.

Meanwhile, the whole “Netflix of Music” bull thesis remains alive and well, and the technicals are pointing to the fact that the worst of this September sell-off is over.

It doesn’t take a rocket scientist to connect those dots.

It’s time to start buying the dip in SPOT stock.

Here’s a deeper look.

Spotify is Killing It

There’s really no other way to put it. From an operational perspective, Spotify is killing it in the music streaming game.

Management continues to lean into Spotify’s superior UI, advanced data-driven song recommendation algorithm, seamless smart device integration (like cars and Google Home speakers), unique playlists and cool features like lyrics integration to make the platform stand out as the most useful and engaging music streaming platform out there.

Beyond that, management is also doing a great job building out a robust original content portfolio, made up almost entirely of exclusive podcasts. About 21% of Spotify’s user base interacts with these podcasts, so they are increasingly turning into a big engagement driver.

Spotify is also creating other forms of original content (like audio books) to further flesh out the platform’s content moat.

And, perhaps most exciting, Spotify continues to grow its two-sided marketplace, with the number of artists using Spotify for Artists tools on a monthly basis growing 68% year-over-year in the second quarter to more than 690,000.

All in all, Spotify really is doing everything right to turn into the Netflix of music one day. This has been true all year long, as SPOT stock nearly doubled from January to July, and it remains true today, as SPOT stock is selling off.

Spotify is still king of music streaming.

The Valuation is Now Reasonable

The only thing I didn’t like about SPOT stock back in July was that it was aggressively overvalued given sluggish financial trends.

That is, Spotify is driving user growth via strong platform improvements and package subscription discounting with Family and Duo plans. The discounting aspect is dragging down average revenue per user, and weighing on overall revenue growth. Simultaneously, gross margins are anemic, and therefore, profit margins will never be that big at scale.

However, the aggressive overvaluation in SPOT stock has been wiped out by the recent sell-off.

I maintain that Spotify stock is worth somewhere around $230 today, meaning that today’s prices are no longer expensive — they are fair.

And in this market, getting your hands on a winning company at a fair price is a recipe for outperformance.

The Technicals Show Support

When looking at a falling stock in the midst of a longer-term uptrend, it’s important to look for clues in the technicals to reasonably deduce when the selling will end.

When you do that with SPOT stock, there’s reason to believe that this current sell-off is essentially over.

Spotify’s 100-day moving average presently hovers around $235. Spotify stock, in September, has shown support at this 100-day moving average over the past few days.

Indeed, it looks like SPOT stock is consolidating around this 100-day moving average and letting the fundamentals catch up, before ripping higher again.

Bottom Line on SPOT Stock

Spotify is a long-term winner. The SPOT stock price just sprinted ahead of the fundamentals in July/August.

In September, the stock has reasonably retreated, and is now allowing for the fundamentals to catch up. As soon as they do, SPOT stock will get back to its winning ways.

I’d look to buy the dip in SPOT stock around $230.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

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