Spotify Needs to Handily Beat Long-Term Expectations

  • Spotify (SPOT) is finding support at around $150 per share
  • Based on long-term earnings projections, future growth may already be priced in
  • With the possibility growth stocks pulling back again, you may want to wait before buying
Spotify (SPOT) logo is on the screen of a smartphone with headphones plugged in.
Source: Kaspars Grinvalds / Shutterstock.com

Shares in Spotify (NYSE:SPOT) have sharply since the tech sell off kicked off last November. At around $146 per share today, SPOT stock is down by around 50% from its all-time high.

But while it may be moving higher in line with a rebound in other tech names, that may not mean SPOT stock is on its way to its all-time high of over $300 per share. On a longer time frame, at best it may only be able to sustain a valuation at or near today’s prices.

Spotify appears fully priced, relative to long-term earnings projections. Granted, it may be a bit short-sighted to cite this as the sole reason why it’s not worth buying at today’s prices. With its move into podcasting, Spotify is expected to see its bottom line balloon in a big way between now and 2025.

Still, you may want to wait. There’s a strong chance this stock, like tech stocks in general, experiences further weakness. This will give you the opportunity to buy in at a price that discounts, instead of fully reflects, future growth.

SPOT Spotify Technology S.A. $146.04

SPOT Stock and Future Earnings

Since 2018, Spotify has grown its revenue from $5.25 billion to $9.67 billion. Although revenue growth is slowing down, analysts expect a big increase in earnings in the years ahead.

“What’s the problem?” you may be asking. Yes, the company has seen little issue monetizing its audience. It stands to turn its big listener base into big profits. The problem is that today’s valuation fully prices in this earnings bump.

Per analyst estimates, Spotify is expected to see its earnings per share climb from around 6 cents this year to $5.30 per share by 2025. This implies that SPOT stock trades for around 28x expected earnings three years out.

Sure, it’s not a frothy valuation. But it’s a multiple this stock would likely trade for, when it reaches full maturity. Again, there is the possibility that it exceeds expectations in the coming years. Even so, it’s far from certain that the company’s move into podcasting will result in this happening.

No Guarantee Spotify Exceeds Expectations

For now, Spotify’s bread and butter remains music streaming. Yet there’s only so much more it can do to improve the profitability of its main content offering. That’s because it pays out the lion’s share of revenue it generates in music sales as royalties to the right holders.

With this, Spotify is banking future growth on its podcast business. The controversy surrounding its best-known podcast personality (Joe Rogan) notwithstanding, its billion-dollar move into podcasting has been a success so far. Podcast advertising was the main driver behind Spotify’s strong ad revenue growth (40%) last quarter.

Following this success, the company is leveling up, acquiring two podcast advertising technology companies (Chartable and Podsights) in order to maximize its podcast ad revenue. But while this strategy appears promising, it’s far from guaranteed that SPOT stock will enable it to handily beat expectations.

Competition in the podcasting space could heat up again. For instance, Apple (NASDAQ:AAPL), after losing the podcast crown to Spotify, is at work trying to regain lost ground. The Rogan controversy could have an impact on customer churn in the current quarter. Per a Seeking Alpha commentator, this was not something baked into its guidance for the quarter.

The Bottom Line

Spotify is neither overvalued or undervalued at today’s prices. Rather, it trades at a valuation in line with expected earnings growth in the years ahead.

You may be confident that the market is underestimating how much of a game changer podcasting will be for its future profitability. Even so, waiting for a more discounted price may be the best move.

The uptick in stock prices, especially growth/tech stock prices, appears to be a relief rally, and not necessarily a sign that the market has reached a bottom. The Federal Reserve is getting more serious about tackling inflation with higher interest rates. This could mean another round of sell-offs for still-pricey tech stocks on valuation grounds.

If you’re bullish that Spotify beat expectations, any further weakness could be a great buying opportunity. Until that happens, hold off on buying SPOT stock.

On the date of publication, Thomas Niel did not hold (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.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.


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