Spotify Technology S.A. SPOT stock has experienced a 153% upsurge this year, surpassing the industry’s 64% rally and the 26% rise of the Zacks S&P 500 composite.
Year-to-Date Price Performance
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In the most recent trading session, the stock closed at $475.24, nearing its 52-week high of $489.69. SPOT is trading above its 50-day moving average, reflecting bullish investor sentiment.
SPOT Stock Trades Above 50-Day Average
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With SPOT shares maintaining strong momentum, many investors are likely questioning whether the stock still holds investment potential. Let us delve deeper into the details.
SPOT Leverages Growth & Pricing Power
Spotify's performance metrics have 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. The third quarter of 2024 was the third consecutive quarter wherein premium subscriber growth outpaced ad-supported MAU growth sequentially, highlighting the effectiveness of Spotify’s pricing strategy.
The company's premium subscriber revenues, which account for approximately 88% of total revenues, play a crucial role in its financial performance. Ad-supported revenues contribute the remaining 12%. 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 expanding its content portfolio, aiming for a larger portion of revenues from its podcasts and audiobooks. By boosting revenues from these high-margin content initiatives, the company could enhance its profitability, even if record labels take a tougher stance in negotiations. The profitability of podcasts is also on the rise as SPOT shifts its strategy from using content investments primarily for subscriber growth to focusing on monetization.
SPOT’s Sharp YTD Surge Inflates Valuations
Spotify's strong 2024 performance and market share gains have fueled a sharp stock surge, elevating its valuation significantly. Currently, SPOT trades at a forward 12-month P/E ratio of 55.21X, exceeding the industry’s average of 40.07X. Its enterprise value/EBITDA ratio of 85.9X is considerably higher than the industry’s 52.87X, 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 Move Down
Four estimates for the fourth quarter of 2024 have moved downward over the past 60 days versus two upward revisions. Over the same period, the Zacks Consensus Estimate for fourth-quarter 2024 earnings has decreased 2.9% to $2.01. Seven estimates for 2024 moved south over the past 60 days versus one northward revision. Over the same period, the consensus estimate for 2024 earnings has decreased 4.7% to $6.02.
Spotify: Hold Amid Valuation Concerns
SPOT's robust stock surge reflects its effective pricing strategies, subscriber growth and profitability improvements from high-margin initiatives like podcasts and audiobooks. The company’s ability to raise prices while expanding its subscriber base underscores strong operational execution.
However, the stock’s valuation is steep and significantly above industry averages, signaling limited upside potential in the near term. Downward revisions in earnings estimates for the fourth quarter and 2024 indicate challenges in meeting elevated growth expectations.
Given these factors, a hold strategy seems prudent, allowing investors to benefit from long-term growth while remaining cautious about short-term valuation risks.
SPOT currently has a Zacks Rank #3 (Hold).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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