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Spotify's Profit Push Emboldens Bulls and Spurs to Record Win Streak

May 29, 2024
minute read

Less than a year ago, Spotify Technology SA increased prices on its US premium plans for the first time, a move that has significantly benefited investors, leading to an approximate 80% surge in the stock. This impressive performance has positioned the shares for a potential 10 consecutive monthly gains, marking their longest winning streak ever. The company's efforts to enhance profits, attract new subscribers, and introduce new features have contributed to this success. Despite doubling over the past year, the stock remains about 14% below its 2021 peak, with analysts predicting further growth.

"Spotify has made steady progress toward profitability," said Tejas Dessai, a research analyst at Global X. He noted that while earnings growth must continue, there are no immediate threats to the company’s fundamental progress in the short to medium term.

Since going public in 2018, Spotify has consistently reported annual losses, largely due to paying about 70% of its sales in royalties to the music industry. Recently, the company has taken significant steps to reduce costs, including cutting thousands of jobs and expanding into new entertainment sectors such as audiobooks, where it competes with Amazon.com's Audible.

Spotify plans to further increase subscription prices this year and has reduced investment in original audio programming. Dessai believes these strategies put the company on solid ground, stating, "We believe they can sustain these advantages while continually trimming costs."

Despite a recent pause in its stock rally, analysts generally expect Spotify's stock to grow another 9% over the next year. The stock has received an unprecedented number of buy ratings, with 25 analysts recommending buying, 11 suggesting holding, and only one advising selling.

"The market loves seeing margin expansion on these companies as of late," said David Wagner, a portfolio manager at Aptus Capital Advisors LLC.

However, some caution against Spotify's valuation. Even though it has decreased this year, the stock trades at approximately 50 times forward earnings, compared to about 26 times for the tech-heavy Nasdaq 100. "From a valuation perspective, it’s pretty rich," remarked Brian Frank, a portfolio manager at Frank Capital Partners LLC.

Nonetheless, Justin Patterson from KeyBanc Capital Markets, one of the stock’s most optimistic analysts, raised his price target to $400 in April. He suggested that Spotify was "breaking out of the tortured profits department," referencing Taylor Swift’s latest album. Patterson highlighted that Spotify is showing faster-than-expected margin improvements and sustainable mid-teens revenue growth. With operating profit projected to double, KeyBanc views Spotify as having one of the most compelling profit growth trajectories in the internet sector.

In a related context, Nvidia Corp. shares have surged nearly 20% following their exceptional earnings results, adding about $450 billion to the chip giant’s market value. Nvidia's market capitalization of around $2.8 trillion is closing in on Apple Inc.'s approximately $2.9 trillion, intensifying the competition for the title of the world's second most valuable company.

Bryan Curtis
Eric Ng
John Liu
Editorial Board
Bryan Curtis
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

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