Spotify Can’t Make a Turnaround Until It Can Show Profitability

  • Spotify Technology (SPOT) plans to release its first-quarter 2022 results on Wednesday, April 27.
  • Alphabet (GOOGGOOGL) has said it will allow Spotify to offer its own billing in its Android app.
  • SPOT stock is now down more than 52% year-to-date (YTD), implying it has to double just to break even for the year.
Close up view of a smartphone with Spotify logo on display. Laptop and headphone on background. New technology, social media, network, liquid music concept.

Source: Fabio Principe / Shutterstock.com

Spotify Technology (NYSE:SPOT) is having a rough time this year. It is down more than 52% year-to-date (YTD) to $112.17 as of April 21. That is a miserable performance for its shareholders. I am sure they are hoping something will pop that could turn things around for SPOT stock — and maybe something has.

Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) announced on March 23 that it will allow Spotify to run direct billing for customers who elect to be billed by the company. Spotify subscriptions from a future version of its Android app will be able to renew without having to go through Google Play. This will likely help Spotify, since Google will probably not be able to charge its customary 30% on every transaction if Spotify does the renewals.

Moreover, Spotify plans to release its first-quarter results on Wednesday, April 27. Analysts will be looking at any comments the company makes about the new arrangement with Alphabet.

In particular, they will be trying to confirm if Spotify will have a lower fee from Alphabet if it runs its own renewals. This is so important because the additional revenue will have very little cost. It will go straight to the bottom line and dramatically enhance Spotify’s free cash flow (FCF) going forward.

SPOT Spotify Technology $112.73

Where This Leaves SPOT Stock

Last quarter, the company reported revenue growth of 24% year-over-year (YOY) to almost 2.69 billion euros. Most of the company’s revenue is from premium subscriptions, but its ad revenue is now growing quickly.

Refinitiv’s survey of 21 analysts (as seen on Yahoo! Finance) now expects Spotify will produce $2.83 billion in revenue for Q1. That will be more than 10.4% higher than last year when it was $2.56 billion, and 5.2% higher than last quarter.

Assuming Spotify can make this threshold, SPOT stock has a chance of moving higher. That will especially be the case if there is good news on the front with Alphabet as explained earlier.

However, analysts also expect earnings will be a loss of 25 cents per share for Q1, but a profit of 3 cents per share in Q2. This will be better than last year, but the market doesn’t really want to see negative earnings with SPOT stock down so far this year.

The good news is analysts do forecast positive earnings of 4 cents in earnings per share (EPS) for 2022. That compares with a loss of $1.14 last year. This is the kind of turnaround the market wants to see. However, most of that turnaround is forecast to happen during Q3 and Q4. The market might not be willing to wait that long.

Where This Leaves Investors

So far, analysts are still very positive on SPOT stock. For example, the average price target of 27 analysts covered by Refinitiv is $221.25 per share. This is almost double the price today. In other words, these analysts are very positive on SPOT stock.

However, Seeking Alpha shows the price targets for 29 analysts have been declining pretty quickly. For example, in mid-January 2022 it peaked at $301.93, but by the end of February, it was down to $237.11. Today, the same analysts have lowered their target price to $213.31. One suspects the average price target is likely to keep falling if the company keeps showing negative earnings as forecast.

The truth is SPOT stock trades at a very high price-to-sales (P/S) multiple. Its market capitalization is $22.18 billion, but forecasts for revenue are at $12.57 this year and $14.64 billion next year. That puts it on a P/S metric of 1.76x this year and 1.51x next year. These are high multiples for a company that is not yet profitable and only forecast to be so in the future.

As a result, investors may want to wait until its Q1 earnings come out to see what Spotify forecasts for the year. Hopefully, sometime soon the company will get profitable, especially if there is good news about the Alphabet arrangement.

On the date of publication, Mark Hake 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.

Mark Hake writes about personal finance on mrhake.medium.com, Newsbreak.com and Beehiiv.com.


Article printed from InvestorPlace Media, https://investorplace.com/2022/04/spot-stock-needs-to-show-profitability-soon-before-it-can-make-a-turnaround/.

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