Spotify Technology S.A. SPOT has seen its stock skyrocket 98.2% year to date, significantly outperforming the 33.5% rally of the industry.
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As of the last trading session, the stock closed at $372.5, close to its 52-week high of $389.23. SPOT is trading above its 50-day moving average, indicating a bullish sentiment among investors.
SPOT Stock Trades Above 50-Day Average
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Given the continuous strength in SPOT shares, investors may wonder if there is still an opportunity to invest in the stock. Let’s take a closer look.
SPOT's Strong Growth Driven by Price Hikes, Podcast Gains
Spotify investors have many reasons to be optimistic when it comes to the company’s financial results. Premium subscribers grew 12%, and ad-supported monthly active users (MAUs) increased 15% in the second quarter of 2024. The growth in total MAU was 14% year over year. Spotify increased its gross profit by 45% year over year, expanding its gross margin by 510 basis points. It also turned an operating loss of $247 million into a profit of $266 million over the year. The adjusted EPS of $1.43 marked a substantial 184.6% year-over-year jump.
Spotify's performance has been bolstered by sustained price hikes, a loyal consumer base, and significant cost reductions. The ability to raise prices while retaining and expanding its subscriber base is particularly noteworthy. This was the first quarter where premium subscriber growth outpaced ad-supported MAU growth sequentially, highlighting the effectiveness of Spotify’s pricing strategy.
The recent price hikes, alongside those by competitors such as Alphabet's GOOGL YouTube Premium, Apple’s AAPL Music/TV, and Amazon’s AMZN Music Unlimited, underscore the industry's trend toward higher pricing.
Spotify is further expanding its content portfolio, aiming for a larger portion of its revenues to come from its podcasts and audiobooks. By boosting revenues from these high-margin content initiatives, Spotify could enhance its profitability, even if record labels take a tougher stance in negotiations. The profitability of podcasts is also on the rise, as the company shifts its strategy from using content investments primarily for subscriber growth to focusing on monetization.
By the second quarter of 2024, Spotify hosts over 250,000 video podcast shows, with more than 170 million users having watched a video podcast on the platform.
Following a crucial EU legal victory, Spotify gained relief as Apple scaled back its competitive pressure against the platform, enabling Spotify to expand its market share. Additionally, Spotify stands to benefit from the recent shutdown of TikTok Music.
SPOT’s Sharp YTD Surge Has Inflated Valuations
Spotify's strong 2024 performance and market share gains have fueled a sharp stock surge, elevating its valuation significantly. Currently, Spotify trades at a trailing 12-month P/E ratio of 45.53X, exceeding the industry’s average of 38.03X. Its enterprise value/EBITDA ratio of 121.19X is more than double the industry standard of 54.58X, underscoring the premium investors are paying. While optimism about growth has driven these valuations, sustaining such high multiples may prove challenging, increasing the risk of a correction if growth fails to meet expectations.
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Estimates Have Moved Down
One estimate for the third quarter of 2024 moved downward over the past 60 days versus no upward revision. Over the same period, the Zacks Consensus Estimate for third-quarter 2024 earnings has increased 2% to $1.79. One estimate for 2024 moved south over the past 60 days versus no northward revision. Over the same period, the consensus estimate for 2024 earnings has increased 2% to $6.24.
Recommendation: Sell
The stock’s sharp price surge has pushed its valuations to elevated levels. Maintaining these high multiples could be difficult, raising the likelihood of a correction if growth falls short of expectations.
Investors who have held SPOT for an extended period may consider locking in profits at this point, as the company's worsening earnings estimates present uncertain prospects. For potential investors, it may be wise to steer clear of SPOT for the time being.
SPOT currently sports a Zacks Rank #4 (Sell). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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