Investors Heavily Search Spotify Technology (SPOT): Here is What You Need to Know

Spotify (SPOT) is one of the stocks most watched by Zacks.com visitors lately. So, it might be a good idea to review some of the factors that might affect the near-term performance of the stock.

Shares of this music-streaming service operator have returned +9.6% over the past month versus the Zacks S&P 500 composite's +3.4% change. The Zacks Technology Services industry, to which Spotify belongs, has gained 1.9% over this period. Now the key question is: Where could the stock be headed in the near term?

While media releases or rumors about a substantial change in a company's business prospects usually make its stock 'trending' and lead to an immediate price change, there are always some fundamental facts that eventually dominate the buy-and-hold decision-making.

Revisions to Earnings Estimates

Rather than focusing on anything else, we at Zacks prioritize evaluating the change in a company's earnings projection. This is because we believe the fair value for its stock is determined by the present value of its future stream of earnings.

We essentially look at how sell-side analysts covering the stock are revising their earnings estimates to reflect the impact of the latest business trends. And if earnings estimates go up for a company, the fair value for its stock goes up. A higher fair value than the current market price drives investors' interest in buying the stock, leading to its price moving higher. This is why empirical research shows a strong correlation between trends in earnings estimate revisions and near-term stock price movements.

For the current quarter, Spotify is expected to post earnings of $1.08 per share, indicating a change of +163.9% from the year-ago quarter. The Zacks Consensus Estimate remained unchanged over the last 30 days.

For the current fiscal year, the consensus earnings estimate of $4.78 points to a change of +262% from the prior year. Over the last 30 days, this estimate has remained unchanged.

For the next fiscal year, the consensus earnings estimate of $6.76 indicates a change of +41.3% from what Spotify is expected to report a year ago. Over the past month, the estimate has remained unchanged.

Having a strong externally audited track record, our proprietary stock rating tool, the Zacks Rank, offers a more conclusive picture of a stock's price direction in the near term, since it effectively harnesses the power of earnings estimate revisions. Due to the size of the recent change in the consensus estimate, along with three other factors related to earnings estimates, Spotify is rated Zacks Rank #1 (Strong Buy).

The chart below shows the evolution of the company's forward 12-month consensus EPS estimate:

12 Month EPS

12-month consensus EPS estimate for SPOT _12MonthEPSChartUrl

Projected Revenue Growth

While earnings growth is arguably the most superior indicator of a company's financial health, nothing happens as such if a business isn't able to grow its revenues. After all, it's nearly impossible for a company to increase its earnings for an extended period without increasing its revenues. So, it's important to know a company's potential revenue growth.

In the case of Spotify, the consensus sales estimate of $4.08 billion for the current quarter points to a year-over-year change of +17.9%. The $16.73 billion and $19.15 billion estimates for the current and next fiscal years indicate changes of +16.7% and +14.5%, respectively.

Last Reported Results and Surprise History

Spotify reported revenues of $3.95 billion in the last reported quarter, representing a year-over-year change of +21%. EPS of $1.05 for the same period compares with -$1.24 a year ago.

Compared to the Zacks Consensus Estimate of $3.87 billion, the reported revenues represent a surprise of +2.05%. The EPS surprise was +66.67%.

Over the last four quarters, Spotify surpassed consensus EPS estimates two times. The company topped consensus revenue estimates two times over this period.

Valuation

Without considering a stock's valuation, no investment decision can be efficient. In predicting a stock's future price performance, it's crucial to determine whether its current price correctly reflects the intrinsic value of the underlying business and the company's growth prospects.

While comparing the current values of a company's valuation multiples, such as price-to-earnings (P/E), price-to-sales (P/S) and price-to-cash flow (P/CF), with its own historical values helps determine whether its stock is fairly valued, overvalued, or undervalued, comparing the company relative to its peers on these parameters gives a good sense of the reasonability of the stock's price.

As part of the Zacks Style Scores system, the Zacks Value Style Score (which evaluates both traditional and unconventional valuation metrics) organizes stocks into five groups ranging from A to F (A is better than B; B is better than C; and so on), making it helpful in identifying whether a stock is overvalued, rightly valued, or temporarily undervalued.

Spotify is graded D on this front, indicating that it is trading at a premium to its peers. Click here to see the values of some of the valuation metrics that have driven this grade.

Bottom Line

The facts discussed here and much other information on Zacks.com might help determine whether or not it's worthwhile paying attention to the market buzz about Spotify. However, its Zacks Rank #1 does suggest that it may outperform the broader market in the near term.

7 Best Stocks for the Next 30 Days

Just released: Experts distill 7 elite stocks from the current list of 220 Zacks Rank #1 Strong Buys. They deem these tickers "Most Likely for Early Price Pops."

Since 1988, the full list has beaten the market more than 2X over with an average gain of +24.2% per year. So be sure to give these hand picked 7 your immediate attention. 

See them now >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Spotify Technology (SPOT) : Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Info icon

This data feed is not available at this time.

Sign up for the TradeTalks newsletter to receive your weekly dose of trading news, trends and education. Delivered Wednesdays.