Stock Groups

Spot a Bright Tomorrow with SPOT Stock By TipRanks


© Reuters. Spot a Bright Tomorrow with SPOT Stock

Spotify Technology SA (NYSE:) is a Europe-based audio streaming service provider. It is the world’s most popular music streaming application, with over 350 million users and more than 165 million paid subscribers. The company is making news for the right reasons. SPOT stock has traded 20% higher in the last month.

Spotify is still well below its record highs at $387.44 and trades approximately 35% lower. Despite this, I am still optimistic about the potential for SPOT stock’s return to those levels. Let’s look at a few potential catalysts to take the company along for a pleasant ride.

(See Spotify Technology SA stock charts on TipRanks)

The Buyback Announcement

On Aug. 20, Spotify announced that its top brass was on board with a share repurchase program worth $1 billion. The buyback will be completed over five years.

Although it is not surprising that this announcement has been made, it does increase growth investors’ expectations for SPOT stock. A buyback will ensure that the share count of a company continues to fall (or stays steady if it allows for DRIPs or shares-based compensation).

Spotify’s $1 billion previous share repurchase announced in November 2018 has ended as of April 2019. Spotify’s buybacks are proving successful for the investors who were bullish about another leg.

Spotify may be argued by some investors that it would serve them better to forgo the buyback. This growth capital could be reinvested into the business. Some investors might like Spotify’s return of value, while others may see this as a problem.

Spotify has every reason to think it is doing the share-repurchase program as it has enough liquidity to meet all of its objectives. Additionally, this buyback is relatively small, in that it represents approximately 2.5% of Spotify’s market cap.

Management may have felt it was the best time to calm long-term shareholders, after the dramatic decline of SPOT stock. This announcement can be viewed as a bullish signal for anyone looking to retain a growth stock within this environment.

Other Catalysts for SPOT Stock

During Spotify’s Q4 earnings call, CEO Daniel Ek informed investors that the company might dial down its M&A efforts moving forward. It would enable the management to reduce investments in Spotify’s production assets, which includes all the recently acquired studios.

In particular, Spotify has made large investments in its podcasting business over the past few years. Spotify’s Ringer, Gimlet and Parcast portfolio assets will be the company’s main focus. Additionally, the company will be looking to leverage its exclusive contracts with various podcast personalities, as well as seting up its own podcast studio – Spotify Studios.

The company bought Anchor and Megaphone, two podcast distribution businesses for $365million. With the Spotify Audience Network, these will also be key revenue generators for advertisers. Spotify’s ambitions to expand its reach in this area are highlighted by the fact that this service is not available outside of the United States.

Investors should be positive about Spotify’s potential revenue growth in the advertising sector. Spotify is unlikely to report only 10% of its revenue from advertising.

The company’s podcast business still has a great deal of growth potential to improve its bottom and top lines. Spotify could see its revenue grow at an organic rate of 200% over the next year if it can successfully monetize their business.

Spotify has a great company that can grow long-term and earn excellent earnings. To realize these potentials, investors need only to think about the future.

Spotify Earnings Solid

From an earnings perspective, Spotify has shown impressive growth across most of its lines of business. SPOT stock trades at an impressive multiple of 17 times trailing sales, thanks to this growth.

Spotify’s most recent quarter ended with just $3.63 Billion in cash and cash alternatives, short-term investment, restricted cash, and cash equivalents. This indicates that the company has sufficient capital and will not need to borrow any money soon. The company’s cash flows are strong and it appears that the company is moving in the right direction for its bottom line.

Spotify appears to be making progress in increasing its margins. It could be possible for Spotify to bypass Apple’s 30% subscription commission (NASDAQ:). This is by launching its own direct payment platform. It will improve margins as well as customer service. This strategic decision is a great one for investors.

According to analysts, 22 million more subscribers will be added to Spotify this year. YouTube is only expected to increase its subscriber base by “only 15 million” over that time. Spotify’s valuation seems justified, even in an era of amazing valuations.

What Do Analysts Think About SPOT Stock

Spotify has been rated a moderate buy by TipRanks. There are 15 analyst ratings. 9 buy recommendations, 4 hold recommendations and 2 sell recommendations.

Spotify’s average price target is $293.73. Price targets for analysts can range between $428 and $170 per share.

Bottom Line

Spotify’s recent earnings numbers and buyback plan present an intriguing growth case to consider SPOT stock right now. The stock is not cheap. Investors must pay more for quality in today’s marketplace.

Spotify’s rise seems discounted by the market in relation to the premiums that investors paid earlier this year. For now, however, SPOT stock should be kept on your watchlist by those who are looking for top-notch growth.

Disclosure: Chris MacDonald had no position at the time this article was published.

Disclaimer: This article is solely the author’s opinion and does not reflect the opinions of TipRanks and its affiliates. It should only be used for informational purposes. TipRanks cannot guarantee the reliability, completeness or accuracy of any information. The article does not constitute a solicitation or recommendation to buy or sell securities. The article does not provide legal, financial, investment, or professional advice. It also doesn’t take into consideration the individual needs or requirements. Neither is the information contained in it a complete or comprehensive statement about the subject or issues discussed. TipRanks, its affiliates, disclaim any liability or responsibility in relation to the article’s content. You are responsible for your actions based upon the articles. TipRanks’ or any affiliates does not endorse this article or make it a recommendation. Performance in the past is no guarantee of future performance, price or results.