Spotify (NYSE:SPOT) went public in April 2018 with a share price of around $165. At the time, the platform had 157 million monthly active users and reported an annual revenue of $6.2 billion. Since then, monthly active users have crossed 406 million, and its latest yearly revenue stood at $11.4 billion. But despite the platform’s growth, the stock price has declined to levels comparable to 2018. Admittedly, Spotify did have a 198%-plus rally after the coronavirus pandemic. However, large selloffs have more than halved the price, and the stock appears quite oversold. If the broader market remains normal, a rebound looks very likely.
Spotify has also seen consistent growth of users and revenue. The user base growth has undoubtedly slowed down, but that is to be expected since Spotify already has hundreds of millions of users. The revenue growth, although down, is still similar to where it stood before the pandemic. In short, SPOT is undervalued. and its current issues are too small to rule out a long-term investment.
Spotify also has significant plans for expansion into more countries, and it is likely to reverse the slowdown of growth. If these plans are implemented as planned, Spotify will likely reach its goal of 1 billion users.
Spotify Stock’s Performance Relies on This Key Metric
The critical metric for Spotify is its average revenue per user (ARPU), which is still poor. Paying users are certainly more profitable for Spotify than those who use the platform for free. However, even Spotify’s premium users do not generate anything close to what platforms such as Meta’s (NASDAQ:FB) Facebook generates.
Spotify’s ARPU has also consistently decreased for the past few years. In the last quarter, Spotify’s ARPU for premium declined to $4.98. Fortunately, Spotify has managed to reverse that trend this quarter, and ARPU has increased to $5.03.
However, as I’ve mentioned before, it is still inadequate compared to other tech platforms. Meta’s ARPU is more than double at $11.57 worldwide, and a staggering $60.57 for users in the U.S and Canada. In short, Spotify’s premium users generate half the revenue of what Facebook’s regular users do.
Spotify’s decreasing ARPU was one of the most significant factors behind previous selloffs. However, the trend may now have been reversed, and with an increasing ARPU, investors will find it more worthwhile to invest in SPOT. Moreover, as podcasting booms, Spotify’s ARPU is likely to pick up even more growth in the coming years.
The Long-term Prospects for Spotify Stock
The long-term prospects for Spotify remain quite high, as it is basically becoming the go-to platform for streaming music and podcasts. Spotify reaching its aforementioned goal of 1 billion users would probably make it a tech giant. The current ARPU might not be the best, but Spotify can certainly improve it over the years through trial and error.
For Spotify, most problems are still revenue related, and they can certainly be solved.
As an example, the story of SPOT stock was seen as bearish due to its losses. However, Spotify may have reversed that too, as the company is expected to be profitable this year. If Spotify works to keep the current growth rates consistent, the profits are likely to increase many times in a few years. Of course, with 406 million active users, there is still a lot more room left to grow.
Since most the issues that have plagued Spotify are reversing, the stock is also likely to do the same. According to Alphaspread, Wall Street professionals forecast an average of 75% upside for the stock in 12 months. The highest forecast is 124%, whereas the lowest projection of 10% is still comfortably above the current inflation rate.
Due to the reasons I’ve discussed above, I believe that SPOT is undoubtedly a buy. There is certainly some risk in the short term due to current world events. However, Spotify is still moving in the right direction by solving its most critical issues, and the present risk does not outweigh the significant long-term returns you could get from the stock.
On the date of publication, Omor Ibne Ehsan 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.
