About Spotify
Before we begin talking about Spotify and its stock, let’s start by talking about something of equal importance: what our team is jamming out to on the platform.
Personally, I enjoy my fair share of Jamiroquai, Kanye West, John Soto, Chris Tomlin and of course the awesome and ever so informative MacroHint podcast.
My favorite song right now is probably “Jail pt 2” by Kanye West and the most embarrassing song of my playlists is undoubtedly Ariana Grande’s “get well soon.”
On the other hand, my co-founder has been on a Jamiroquai kick as well, a current favorite as Austin heats up for the next nine months is “Seven Days in Sunny June.”
The song is worth listening to if I do say so myself!
While our music tastes may differ here and there, we do have one thing in common; we both love to use Spotify.
We love the different features available on the mobile app (such as their recently added blend function, their “Time Capsule” playlist and other playlists the company assembles for its users based on their listening activity), the relative inexpensiveness to use the premium version of the platform and how the platform seems to just get us. Specifically, there have been too many awkward moments when Spotify gives me some new music to listen to and I find myself initially thinking it’s alright, then I think it’s good, and shortly thereafter, it finds a place in my “On Repeat” playlist.
The app is also just cool looking and easy to navigate.
We also have noticed in recent history that Spotify has really accelerated its growth and presence in the podcast and visual media entertainment spaces, which is likely just another way for the company to engage with its users and draw in new subscribers as well.
Well-known artists’ music, podcasts and video interviews with pop culture icons are all areas in which Spotify is engaged and they’re seemingly doing a good job in growing through these avenues. However, the company has seen its fair share of controversy, namely as it relates to Joe Rogan’s interviews with medical experts regarding COVID-19.
Pictured above is Joe Rogan
Nonetheless, if you’ve never heard of or used Spotify before, it’s primarily a music and podcast streaming platform.
They offer different subscription services, (one of which is completely free if you’re ok with listening to ads fairly frequently) and the other premium and family models are relatively inexpensive, as we both have family plans with the platform and have enjoyed our experiences so far.
This is the primary way in which Spotify makes money.
Additionally, the company makes money by selling ads on its platform, which is pretty common for most if not all major music streaming platforms.
You’ve now learned about our super awesome music tastes and more importantly, what Spotify does and how the company makes money.
Let’s see if Spotify is worth its weight financially and whether or not you should consider reserving a spot for the company in your investment portfolio.
Spotify’s stock financials
First of all, it should be noted that like most growth companies, this stock has been humbled back down to pre-pandemic stock price territory. Specifically, the stock was trading at around $140 prior to and during the start of the discovery of the COVID-19 pandemic. Over the years, the stock has since increased in price dramatically, flying as high as around $365 per share. Now, the company’s stock is trading at around $115.
Pictured above is Travis Scott, who currently has around 38 million monthly listeners on Spotify
It’s interesting to consider whether Spotify is a recession-proof stock or not. It is our team’s opinion that no matter how bad the economy gets, people will still want to listen to their favorite artists, but they might not want to pay a premium subscription to do so. As long-term investors, we don’t care how many people actually like listening to music for free on the platform, we care about how many people are willing to pay Spotify a monthly fee for listening to music.
Spotify users listening on the platform for free comes at the expense of shareholder value.
However, if we’re wrong and people continue paying to use Spotify during times of economic downturn, that would make us very happy.
Let’s get a better understanding of the company’s financials.
The company currently has a market capitalization of $22.2 billion and a price-to-earnings (P/E) ratio of 286.14.
From an objective, numbers-only perspective, that is atrocious.
If you’ve read some of our previous articles, we tend to explain that if a company’s stock has a P/E ratio of 20, it is said to be trading at fair value whereas under 20 is undervalued and above 20 is overvalued compared to what the company is actually worth.
286.14 is a lot bigger than 20.
Pictured above is one of the founding partners of Spotify, Daniel Ek
So much so that this metric makes us extraordinarily cautious to buy and hold for the long haul. However, we must keep in mind that this is a growth company that has a considerable amount of market share in the space already.
While these are some positives, we don’t want to buy shares in a company’s stock that is this overvalued. Once valuation comes down to more favorable, sensible levels we’ll be a lot more interested.
However, this is not the be all end all for Spotify. This is just a metric that could indicate that the company is experiencing substantial growth and is not worth buying yet, but maybe in the future.
Let’s continue and look into more of Spotify’s financials.
Many well-known growth companies such as DoorDash, Zoom and Roku (just a few random examples) have pretty strong balance sheets even though they are growing.
Spotify’s balance sheet is fine given that its total assets outweigh its total liabilities, however the two are a little close. Specifically, the company’s total assets stand at around $7.2 billion, and their total liabilities are just north of $5 billion. Personally, we’re fine with this level of debt as long as the company can effectively use and manage their debt and not become overleveraged. If this happens, the company will likely be in a lot of trouble and so will shareholders.
On the bright side, according to their income statement their total revenue has been increasing significantly each year since 2017. For instance, their total revenue was around $4.1 billion in 2017 and has risen each year since, holding at nearly $9.7 billion in 2021.
This is a fantastic amount of growth and possibly a reason the company’s P/E ratio is ridiculously high.
Evidently, their cash flow statement tells a similar story. Specifically, each year since 2017 their net income has been in the red, however this makes sense for a company that has been growing both aggressively and rapidly.
Again, we’re not too concerned with negative net income as a result of growth and reinvesting the platform and company, but proper debt management is a must.
Spotify’s stock fundamentals
When it comes to turning a profit, Spotify isn’t the best when compared to the industry average. For example, their trailing twelve-month (TTM) net profit margin is more than 3% lower than that of the industry, currently standing at 0.73% according to TD Ameritrade’s platform.
This will likely change as the company continues to grow and mature, acquire new customers and importantly keep those customers and gobble up more of the industry’s market share.
It should also be understood that the company’s TTM returns on equity, assets and investment are all lower than that of the industry average. Similar to their net profit margin, this is likely to change and get closer to at or above the industry average as they mature and strengthen their user base and content offerings.
Should you buy Spotify stock?
There are a lot of “what ifs” surrounding the future performance of Spotify’s stock and the company as a whole.
The stock appears to be overvalued, their debt levels are a bit high, and they need to keep their customers while simultaneously adding new paying subscribers.
This is no small task, but it is nonetheless what shareholders should want in order to retrieve some value in their portfolios.
Personally, we are pretty bullish on Spotify as a platform and think it’s going to continue to grow and be a preferred platform for many. However, investors need results such as strong profitability and above average returns and we’re not sure you’ll be able to achieve that with Spotify in the near future.
Given all of this information, we currently give the company a “sell” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.