Spotify Can’t Move Upward in Current Risk-Off Environment

  • Spotify and its growth narrative don’t work in a risk-off environment
  • Growth would be compelling in different times
  • Continued losses keep the stock in check for now
Spotify (SPOT) logo is on the screen of a smartphone with headphones plugged in.

Source: Kaspars Grinvalds / Shutterstock.com

Spotify (NYSE:SPOT) stock has made progress, but I can’t see any reason for it to rise from current levels. There are positives and negatives to be taken from the Luxembourg-based firm’s February earnings report. But the overall thrust shouldn’t do anything to make investors believe that prices are going to move upward much. 

That isn’t to say the positives weren’t substantial — we’ll get into those in a bit — but it is just that Spotify’s issues will continue to plague the firm. That should result in share prices going sideways at least through the first quarter. Let’s begin with the good and then get into the bad, while noting that this time, the bad outweighs the good. 

SPOT Spotify Technology $157.32

Positives for SPOT Stock

Most of the positives for Spotify relate to aspects of growth. Investors who consider Spotify’s user growth and its relation to top-line growth could very well be attracted to the firm and buy its stock. 

Broad metrics support that idea: Total Monthly Active Users increased 18% to 406 million by the end of fourth-quarter (Q4) ‘21. That is a nice metric, but what is really impressive here is that the 18% user growth translated to a 24% increase in total revenue during the same period. In other words, Spotify was able to pick up a bunch of high-value customers between the end of 2020 and the end of 2021. 

During the same period, Spotify made particularly strong progress in growing its ad-supported revenues. Those increased by 40%. The company is seeking to increase ad-supported revenue so that it is less reliant upon premium subscriptions as a driving force to its top-line. That said, premium subscriptions also increased by a strong 22% in 2021, outpacing growth in the firm’s user base. 

But that is about as good as it gets for the firm. At the end of the day, the same issues continue to plague Spotify. 

Negatives for SPOT Stock

Spotify isn’t the same company now that it was during the height of the Covid-19 pandemic. Digital media consumption peaked as people were locked down and stuck inside. That simple truth supported high valuations in the market for companies, including Spotify. Investors didn’t care then that Spotify was still producing losses. But they sure do now.

The problem is that while Spotify is heading in the right direction in terms of losses, things aren’t improving fast enough. 

The 581 million Euro net loss the company reported in 2020 impressively shrank to a 34 million net Euro loss to end 2021. But there is a lot of very negative momentum related to those net losses. 

For one, Spotify’s losses in Q4 were particularly troublesome: The company posted a 39 million Euro net loss in the quarter. It only posted a 34 million Euro loss in all of 2021. That means it was in the black through the first three quarters of 2021, but then gave it all back and much more. 

That has to concern the market. But the real problem I see is anticipated losses moving forward.

Spotify gave guidance of an expected 67 million Euro net loss in the first quarter. 2022 hasn’t been kind to tech stocks. But even if it were to immediately change and tech stocks came back into fashion, it isn’t good. Losses are increasing on a sequential basis, or at least they are expected to. 

What to Do

That is why SPOT stock should remain flat at best through the first quarter. There is nothing to suggest that it looks attractive right now. At least, not from what I can see in the earnings report. It keeps losing money and has given guidance suggesting that will continue to do so.

The company will need to increase ad revenue via radio streaming and garner a greater percentage of revenue relative to subscriptions. When it proves that it can approach profitability in doing so, then it is worth looking at. Until then, it is a growth stock that lacks positive market sentiment.

On the date of publication, Alex Sirois 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.

Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks.Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.


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