Spotify (NYSE:SPOT) stock is down about 34% in the year-to-date period, grossly underperforming the Nasdaq 100 which has lost a more modest 8.9%. The stock has been adequately punished for its weak first-quarter premium subscriber guidance issued in early February and the Joe Rogan controversy.
As the market rebounds and amid positive company-specific developments, it could be time to shed that bearish bias on the SPOT stock in anticipation of a mini-run ahead of earnings. The near- to medium-term trajectory hinges on several extraneous developments, including macroeconomic fundamentals and geopolitical tensions that have the potential to affect the company’s fundamental performance.
Spotify Amid Thick and Fast News Flow
Spotify has always been nimble in adding features and services aimed at improving user engagement and experience. Last week, the audio streaming service announced an update to its Blend feature, which is a shared playlist born out of the drive to make listening more personalized and collaborative. The new update increases the number of people you can Blend with to up to 10 and also allows Blending with the users’ favorite artists.
Spotify also announced a partnership with Spanish football club FC Barcelona in mid-March to be the latter’s main sponsor for four seasons, beginning in 2022/2023. The music streaming service’s name will appear on the jerseys of the men’s and women’s teams, and will also be linked to the Camp Nou stadium for at least 12 seasons.
In another positive development, Spotify announced in March a multi-year deal with Google parent Alphabet (NASDAQ:GOOG, GOOGL) to give users the choice of paying with either Spotify’s payment system or with Google Play billing. Google also allowed a reduction from the standard 15% rate it charges developers for subscriptions.
Analysts see the move as a positive for Spotify, both from the perspective of margins and subscriber growth due to the seamless onboarding that accompanies the direct payment to Spotify.
What Near Term Promises for Spotify
The next key catalyst will likely be Spotify’s first-quarter earnings release, scheduled for April 27. Investors, as usual, will remain laser focused on how premium subscriber count shapes up, especially due to the Swedish company’s decision to stop services in Ukraine.
Spotify is on track to report solid key performance indicators in the first quarter, UBS (NYSE:UBS) analyst Batya Levi said in a recent note. The Google deal to allow in-app billing will limit friction in converting ad-supported subscribers to premiums subscribers, the analyst said.
Margin expansion is key for making the Spotify story appealing to investors. The company reported gross margin of 26.5% in the fourth quarter, flat with the year-ago period. The company blamed the stagnant margins on non-music and other content costs and publishing rate increases.
Spotify’s two-sided marketplace — the paid promotion tools it offers to artists and labels and due diligence with a couple of major global labels — will likely drive margin expansion, Evercore ISI analyst Mark Mahaney said in a recent note. The company can improve the gross margin to 30%, plus, in 2024, a year ahead of the timeframe the Street is modeling currently, he added.
Bottom Line on SPOT Stock
As the market digests these catalysts, SPOT stock could pick up some momentum over the next couple of weeks heading into earnings. From then on, the trajectory will be dictated by several dynamics, both specific to the company and external.
An added allure is the stock’s cheap valuation. Spotify’s Price/Sales (P/S) ratio is now at 2.63, closer to the historical low of 2.12 and well off the peak of 7.5 times. The average analysts’ price target for SPOT shares is $242.91, according to TipRanks. This suggests there is scope for about 58% upside from current levels.
Technically, SPOT stock has been consolidating following a rebound from its mid-March bottom. A convincing break above a long-term resistance around $155 could help the stock launch into a rally. The 14-day relative strength index, a momentum indicator is at 35, confirming the oversold nature of the stock.
On the date of publication, Shanthi Rexaline 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.