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Spotify: Look Past Currency Headwinds

May 04, 2018 6:24 PM ETSpotify Technology S.A. (SPOT)43 Comments


  • Spotify reported fantastic Q1 numbers that were hit by currency headwinds.
  • The company continues to expand non-music options and drive innovation in the music industry.
  • The stock valuation remains compelling for a company generating substantial recurring revenues.

The first quarterly report after a company goes public is always dramatic for shareholders and the stock. Different management teams present and guide in different manners and the quarterly report provides the initial opportunity for investors to react to the presented data. In this scenario, the market isn't appreciating the guidance from Spotify (NYSE:SPOT) due in part to over extrapolation of the currency impacts on the results.

Source: Spotify

Currency Headwinds

In the third sentence of the shareholders letter, Spotify summed up the quarterly results without much further research needed.

Total revenue was €1,139 million growing 26% Y/Y, and 37% Y/Y after adjusting for the negative impact from changes in foreign exchange rates.

The stock ended up dipping 6% on the day following earnings that probably wouldn't have occurred if the reported earnings growth was 37%. So basically, the company is located in Stockholm, Sweden, and reports in euros, so the translation with the U.S. dollars impacted revenues. The euro strengthened significantly against the U.S. dollar in the 2H'17 so the comparison to last Q1 is skewed.

Source: XE currency charts

The company only has 40% of subs in Europe so currency impacts could go far beyond the U.S. as well.

Source: Spotify Q'18 shareholder letter

So despite these currency headwinds and knowing that Spotify originally guided towards a €280 million impact for the year, the market just wasn't prepared for the Q2 guidance that revenues might only grow a meager 10%. The currency headwind is alleviated in the 2H based on where the euro trades now. As well, guidance sees €195 million of the impact in the 1H and only €85 million in the 2H.

The overreaction is clearly and likely based on the market not being familiar with Spotify. Very few tech stocks on the U.S. markets report in a

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