Spotify: Still A Long Runway Ahead

Aug. 04, 2020 2:08 PM ETSpotify Technology S.A. (SPOT)5 Comments
Gary Alexander profile picture
Gary Alexander
25.31K Followers

Summary

  • Shares of Spotify have sputtered after the company offered up a mixed Q2 earnings release.
  • User growth remained strong, but revenue and cash flows slipped as expected as the deterioration of ad pricing weighed on Spotify's non-Premium business.
  • Still, Spotify's momentum in the wake of the coronavirus has been strong, and the company has called out recovery in June.
  • As the global leader in streaming and still valued at <4x forward revenues, Spotify still has plenty of room to run higher.
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Spotify (NYSE:SPOT), the global leader in music streaming, got its first major break this year in the markets as an entertainment-starved world gobbled up streaming services like Spotify in the wake of the coronavirus. Shares have risen ~70% this year, making up for years of flat performance since the 2018 direct listing (Spotify was one of the first major unicorns to go public in a so-called direct listing, which doesn't raise any capital or incur tremendous investment banking fees) - but recently the gains have stalled, especially after Spotify's mixed bag of Q2 results.

The question for investors now is: does Spotify have room to run higher?

ChartData by YCharts

Heading into the current quarter, investors were keenly watching three things:

  • User trends. Q1 growth in both free MAUs and Premium users were incredibly strong; would those trends endure into Q2 and beyond?
  • Impact of ad pricing. Almost every internet company has had its books rocked by the decline in ad pricing, hit both by a general pullback by marketers in the effort to conserve cash plus increased distrust of social media companies.
  • Progress in tertiary revenue opportunities. What additional progress has Spotify made toward monetization in podcasting and marketplace services?

In my view, we got positive answers in all three areas in Spotify's Q2 results, and even though Q2 itself was weighed down by ad weakness, the company has given us a line of sight to recovery by commenting that trends exiting Q2 in June were far stronger.

Stepping back into the broader picture - I believe the temporary dip in shares is a good opportunity to buy into this incredible category leader that is both driving admirable user growth plus making steps toward profitability. I continue to view Spotify's purest-play comp as Netflix (NFLX), and despite

ChartData by YCharts

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This article was written by

Gary Alexander profile picture
25.31K Followers
With combined experience of covering technology companies on Wall Street and working in Silicon Valley, and serving as an outside adviser to several seed-round startups, Gary Alexander has exposure to many of the themes shaping the industry today. He has been a regular contributor on Seeking Alpha since 2017. He has been quoted in many web publications and his articles are syndicated to company pages in popular trading apps like Robinhood.

Disclosure: I am/we are long SPOT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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