With Spotify (NYSE:SPOT) expected to turn significantly profitable next year and the valuation of SPOT stock having become quite reasonable in recent months, long-term growth investors should buy the company’s shares at their current levels.
Also likely to help the shares over the medium term are the increased popularity of podcasts and a more optimistic view of the economy by investors that’s likely to materialize in the medium term.
Profitability and an Attractive Valuation for SPOT Stock
Analysts, on average, expect Spotify’s earnings per share (EPS) to come in at 4 cents this year and $1.11 in 2022. The most optimistic analyst expects the company to generate 2023 EPS of $3.29.
Given my upbeat view of Spotify’s outlook, I expect the company’s 2023 EPS to be at least $2. So in my view, SPOT stock is trading at a forward price-earnings ratio of about 56. That’s not a very steep valuation for the company, given that analysts, on average, expect its revenue to climb 18.3% this year and 16.5% next year.
In terms of the forward price-sales ratio, the shares are trading at a very low valuation of just 1.5, based on analysts’ average 2022 sales estimate.
Increased Popularity of Podcasts and Investors’ Sentiment
“Podcasts have exploded in popularity in the last few years,” The Digital Journal reported yesterday. And “62% of the (American) population 12+ has listened to a podcast and roughly 78% are aware of podcasts,” the website reported, citing Statista. What’s more, “there were 383.7 million podcast listeners across the globe in 2021, expected to rise by over 420 million this year,” The Digital Journal reported.
Since Spotify last year was reportedly the top-rated podcast provider in the U.S., the company and SPOT stock are exceptionally well-positioned to benefit from the huge growth of podcast audiences.
Finally, given the fact that the Nasdaq is nearly 25% below its 52-week high, investors seem to be pricing in a recession. However, many, if not most experts, are saying that a recession will most likely not occur in the next 12 months.
Also suggesting that a recession is not imminent, many companies, including American Express (NYSE:AXP), Cleveland Cliffs (NYSE:CLF), Tesla (NASDAQ:TSLA), and multiple airlines have reported strong first-quarter results. Meanwhile, spending on services is climbing, and the U.S. economy is primarily based on services.
As investors become more convinced that a recession is not coming anytime soon, sentiment towards growth stocks, including Spotify, should rebound. Additionally, as I’ve pointed out in past columns, BlackRock has said that the market is overestimating the extent to which the Federal Reserve will ultimately hike interest rates.
Spotify’s expected move into profitability — along with the rising strength of podcasts, the attractive valuation of SPOT stock, and a likely improvement in investor sentiment in the medium term — make SPOT stock a buy for long-term growth investors.
On the date of publication, Larry Ramer 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.