3 Reasons Why Spotify Still Makes Investment Sense

While investors started the week on edge, once the Fed event elapsed Wall Street got bullish. The move was counterintuitive but not too surprising. Wall Street hates uncertainty, so if you eliminate unknowns, they will deal with the issues. Now we know much more about the Fed’s intentions so there is less mystery. The Fed confirmed that they will be aggressively combating inflation, yet markets rose. Jerome Powell’s tone didn’t focus too much on stocks, but rather price stability. In spite of this, I remain optimistic on Spotify (NYSE:SPOT) stock from these levels and for the long term. Despite it’s recent bumpiness, SPOT stock has much more to offer.

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

The company recently fell into hot water from controversial headlines, but SPOT stock can likely weather the storm. The mess started with an interview on the Joe Rogan Show with Dr. Robert Malone. Initially it was from public concerns about presenting misleading covid-19 vaccine information. Then it morphed into using racist language in past episodes.

The show’s popularity will likely survive this, and so will SPOT stock. Strong companies can survive major tests like these. So far, it looks like they are up to the task. After all, this is an important show so there is monetary incentives to “work things out.”

I remember days when the biggest Spotify worry was the competition from Apple (NASDAQ:AAPL). Some experts deemed the company dead, but here it is surviving. In fact they are thriving if we judge its success by growth. Sadly, SPOT stock has acted like the wheels are falling off the wagon. Judging by the numbers in the financial statements, nothing can be further from the truth.

SPOT Stock Support Facts Are Good

Spotify (SPOT) Stock Chart Showing Base
Click to Enlarge
Source: Charts by TradingView

My note today is bullish from three angles. The first technical, the second fundamental and the third simply draws on pure logic. Technically, SPOT stock has fallen into a zone that has served as a base for four rallies. So, the logical assumption is that it will hold again this time. This aspect of my thesis is tactical, so it should come with a specific stop loss. If the support fails, traders should exit the longs and wait for a better entry lower.

From an investment perspective, the financials reveal good news. Somehow it’s mystery to the bears, but the numbers don’t lie. Last year revenues were almost double those of 2018. Gross margins are seven times bigger than 2016. Although they are still slightly net income negative, stock owners now have realistic expectations. This is apparent from the low value of two for its price-to-sales ratio. There is no obvious bloat in these financial metrics.

Simplest logic suggests that this is not an obvious place to exit the stock. Therefore, if the stock market stabilizes, SPOT is likely to have upside potential. It’s realistic not to expect a return to $300 per share this year. But there’s no reason why it cannot enjoy impressive strength. There will be sellers lurking after a 15% rally. More of them will show up as it approaches $180 per share. That was a zone of contention straight out of the pandemic spike. But then the biggest pivotal zone is above $200 per share.

Between here and there, SPOT stock has enough enticement for my taste to take a stab at it. This opportunity blurs the line between trading and investing. The meme on Wall Street is to not turn a trade into an investment. In this case, it could work. Regardless, and while volatility is this high, we should take partial positions. Leaving room to add later is a good way to hedge against surprise drops.

On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Nicolas Chahine is the managing director of SellSpreads.com.


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