Spotify (NYSE:SPOT), a leading popular audio streaming subscription service company, will report its first-quarter 2022 financial results on April 27, 2022, before the market opens. Is SPOT stock a buy ahead of earnings?
The answer depends on the investment criteria used. If you are looking for a stock with excellent sales growth that has losses of nearly 40% in 2022 and has made a rebound of 20% off its 52-week low, then you may think a bottom has already been formed. It may be a great time to buy Spotify stock to take advantage of its “cheap” price.
However, examining the valuation of SPOT stock a bit closer there is another story that should make you reconsider any bullishness. Ignoring SPOT’s valuation is certain to be a very bad idea. Here is why.
Spotify has been losing money for the whole period from 2017 to 2021. Furthermore, it has a P/E GAAP (FWD) of 1,641.93. This is a huge figure as financial metrics used in valuation should be as low as possible to make a stock attractive.
Valuation is either forward-looking or based on what happened in the past quarters or twelve months. Compared to the Communication Services sector, Spotify has only a minor discount on its EV / Sales (TTM) ratio and EV / Sales (FWD) ratio of 2.31x and 2.02x, respectively. The Communication Services sector median value for EV / Sales (TTM) and EV / Sales (FWD) are 2.35x and 2.21x, respectively.
Most key ratios both on a TMM basis and on a forward valuation for SPOT stock show a very large premium to its sector median values. Take for example the EV / EBIT (FWD) ratio for SPOT stock which is 1,744.61, a staggering 10,897.66% difference from the median value of the sector.
What about Price / Sales (FWD) and Price / Cash Flow (FWD) ratios? I have chosen the free cash flow ratio, especially because Spotify, despite its losses, generated positive free cash flows that are highly encouraging. Spotify has a Price / Sales (FWD) ratio higher difference of 40.80% and a Price / Cash Flow (FWD) ratio higher difference of 469.45% versus the median values of the Communication Services sector.
Taking valuation into account, SPOT stock is very expensive and is not a Buy now. That’s true even as there are less than 20 days before it releases its next earnings report. Spotify has made huge steps toward achieving profitability. But having an overpriced stock will be too challenging as the Federal Reserve will tighten its monetary policy and the dominant theme for 2022 will shift from growth to value.
On the date of publication, Stavros Georgiadis, CFA 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.