Spotify (NYSE:SPOT) stock has had a challenging run at the market, shedding over 50% of its value in the past year. Its fourth-quarter earnings release reported a dim user forecast for its upcoming quarter, which sent SPOT stock into a free-fall. However, investors have made a big deal of the company’s short-term weakness, which is unlikely to have a long-term impact on its results this year. Moreover, with the addition of new podcasting businesses, Spotify will continue to expand its market share in the space.
In the past year, Spotify’s share price weakness is largely attributable to its prioritization of long-term growth over margins. During the recent earnings call, its management acknowledged how investments had altered their consolidated gross margin targets. However, they believe that these investments will drive future growth in its top and bottom lines. Hence, the business is sacrificing short-term margin growth to drive expansion in the coming years.
The Growth Machine Is Intact
Spotify’s first-quarter subscriber update didn’t sit too well with investors. There was just a three million bump in its paid subscriber base from 180 million subscribers during the fourth quarter. However, Chief Financial Officer Paul Vogel believes that the unimpressive update will have little impact on the company’s monthly active users (MAUs) growth in 2022.
Moreover, another point of concern is profitability, which seems to have spooked its investors. It has its work cut-out to get closer to its gross profit margin target of 30% to 40%. However, according to CFO Vogel, the business will grow rapidly through organic and inorganic expansion, positively impacting margins. He states:
…it is exactly this progress that has given us the conviction to increase our investments in certain areas and gives us confidence that we are on the right path over the long term.
Moreover, advertising has become a critical element of Spotify’s success. The platform can gather data and leverage its AI capabilities to widen its competitive advantages. In the fourth quarter, ad revenues jumped 40% from the previous year, amounting to 15% of total revenues. The company’s long-term goal is to offer significantly cheaper ads from current levels and use its technology to offer better results compared with its peers and other mediums.
Recent Acquisitions Point to an Incredible Growth Runway
Spotify recently announced a couple of compelling acquisitions, both of which will add plenty of value to its business. These include podcast analytics platform, Chartable, and a podcast advertising measurement service, Podsights. Chartable offers a unique blend of tools that provide insights and attribution measurement for podcast promotion. The enterprise has an incredible track record of working with some top media and advertising companies. These include iHeart Radio, Vox Media, Betches, and others.
Similarly, Podsights is another sure-fire winner for Spotify in boosting future growth in its podcasting business. Podsights claims to be working with roughly 900 brands with a whopping $300 million spend. Podcasting is growing swiftly for Spotify as a proportion of its overall business, and such investments will feed into its juggernaut.
What to Do With SPOT Stock?
Simply put: SPOT stock is a “Buy.”
The market’s reaction to its recent subscriber update is remarkably overblown and shouldn’t deter long-term investors. The expansion of the company’s podcasting business will help achieve most of its goals and support its stock price. SPOT stock trades at just 2.2 times forward sales despite its stellar outlook. It’s a steal at current levels, and with perhaps more weakness in the interim, it’s best to add it to your portfolio now.
On the date of publication, Muslim Farooque 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.
