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The Spotify Stock Price Looks Unsustainable in the Near Term

Tezcan Gecgil

Investors in the Stockholm-based streaming music company Spotify (NYSE:SPOT) had a good 2019. Year-to-date, Spotify stock is up about 35%.

The Spotify Stock Price Looks Unsustainable in the Long Term

Source: Kaspars Grinvalds / Shutterstock.com

Yet, this up move is only half of the story as it has also been a volatile year. Spotify shares moved between troughs and peaks several times, usually in reaction to quarterly earnings results. Therefore, long-term investors are wondering if they should buy prior to the release of next earnings results, expected in early February.

I’d like to see the fundamental metrics to be released before committing any capital into Spotify shares.

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Investors Cheered Spotify’s Q3 Results

Spotify released Q3 financial results in late October. The streaming company earned equivalent of 40 cents a share on $1.93 billion in revenue (Spotify reports earnings in euros).

Both numbers beat Wall Street’s estimates of -32 cents per share and $1.90 billion. The positive EPS as opposed to a loss especially delighted investors.

Spotify’s total monthly active users (MAUs) include premium subscribers as well as users of its free, ad-supported music tier. Management reported better-than-expected user growth.

The quarter saw Spotify add 5 million new paying subscribers. It has now 113 million premium subscribers. In total, the company reported 248 million total monthly active users, up 7% from the previous quarter and up 30% YoY.

As the group posted an unexpected third-quarter operating profit — its second in history — SPOT stock surged the next day.

Now, investors would like to see management keep up the strength in various metrics and numbers so that the SPOT stock price can continue its uptrend.

Podcasting and SPOT Stock

During the quarter, surging podcast interest drove Spotify’s earnings beat.

In its shareholder letter, management said “we continue to see exponential growth in podcast hours streamed (up approximately 39% quarter over quarter) and early indications that podcast engagement is driving a virtuous cycle of increased overall engagement and significantly increased conversion of free to paid users… Overall, the business is performing strongly.”

Most of the increase in podcasting hours came from the U.S., followed by Europe and Latin America. By 2022, the podcast market worldwide is expected to reach $1.6 billion and comprise 4.5% of all audio ad spend. Thus Spotify will likely continue efforts to reach audiences globally.

Earlier in 2019, Spotify bought Gimlet, Anchor and Parcast in its podcast push. Management has set aside about $500 million in total for more podcast-related acquisitions in its quest to make users spend more time on the platform. The company is now promoting podcast content it produces in-house.

The Street at this point believes that the group’s podcast strategy is on the right track. After all, the streaming giant has been increasing user engagement and benefitting from the conversion of ad-supported users to fee-paying premium users.

The group’s own website is also upbeat on the future of the business as it highlights that:

“Spotify has over 200 million listeners across more than 75 countries worldwide just waiting to discover podcasts like yours. We’re the second most popular place to listen to podcasts in the world — and growing fast. Our podcast audience has nearly doubled since the start of 2019.”

And long-term investors are hopeful that podcasting efforts continue to pay off so that Spotify stock exhibits high growth and improves profitability in 2020.

Competition Could Derail Spotify Stock

Music streaming is a competitive market where Spotify is the leader.

As of the first half of 2019, Spotify has 36% of the global subscribers. It is followed by Apple’s (NASDAQ:AAPL) Apple Music (18%), Amazon’s (NASDAQ:AMZN) Amazon Music (13%), Tencent‘s (OTCMKTS:TCEHY) Tencent Music (10%), and Alphabet’s (NASDAQ:GOOGL, NASDAQ:GOOG) Google Play Music (5%).

Yet, as our readers will notice, music streaming is not the only business for Spotify’s competitors. In other words, they do not necessarily have to bring in constantly high revenues to make their services meaningful.

In its efforts to keep the top slot, Spotify has to constantly renovate, increase TMUs, and find ways to keep costs down while it ups revenue.

Currently, three labels— Warner Music Group, Sony Music Entertainment, and Universal Music Group — control about 90% of the music market in the U.S. These steaming platforms including Spotify mostly act as middlemen when they license music from these labels,  charge users to listen to the music and in return pay labels part of sales.

As the number of streaming platforms grows, it becomes increasingly difficult for Spotify to make money “when music-rights holders collect more than 75¢ on every dollar.”

At present, Spotify makes 90% of its revenue from subscriptions and the other 10% from advertisements. Q3 results highlighted that in its efforts to grow revenue, the group aims to increasingly monetize its ad-supported service.

During the quarter, Spotify had 141 million ad-supported listeners. Going forward, we can, therefore, expect more emphasis on its ad sales growth rates.

As competitors keep circling Spotify, the new year may mean cut-throat pricing wars and lack of profits for music streaming platforms. Then SPOT stock may easily come under pressure.

Where SPOT Stock Price is Now

When Spotify stock went public on Apr. 3, 2018, it opened at a price of $165.90. In July, it saw an all-time high of $198.99, after which the share price decline steadily until Dec. 2018 when it saw an all-time low of $103.29.

Since then Spotify stock has gyrated and traded in a range between about $120 and high-$150’s level.

On Oct. 25, prior to the release of Q3 earnings, SPOT stock closed at $120.69. On Oct.28, the stock opened at $131.11. Now it is hovering around $153.17.

Given the recent impressive gains by the stock, especially in the past few months, its short-term technical indicators have become somewhat overextended. Investors who pay attention to short-term technical charts and oscillators should note that Spotify shares look overbought.

From a technical perspective, I am not expecting SPOT stock to make a significant leg up any time soon. Instead, in the coming days, there might be some profit taking. It’s likely that a lot of good news has already been priced into the Spotify stock price.

The Bottom Line on Spotify Stock

Steaming is everywhere. Spotify is best known as a music platform first and its brand is especially well-respected among professionals and companies in the music business, ranging from creators to managers to labels.

However, like other music streaming models, the group lacks bargaining power with record labels. Thus it has limited potential to become profitable.

Now management is working to create a sticky business model in podcasting that may clear the route to profitability. Could 2020 be the year when SPOT stock benefits from the investments in this part of the business?  The recent increase in the Spotify share price may well be a reflection that the Street is listening to Spotify’s podcasts.

But then leaders can also be easily be displaced in the fast-moving and brutal tech space.

If you believe in the long-term bull case for SPOT stock, then you might consider waiting for a better time to get long, such as around low-$140 or even high-$130 levels.

Expect nearer-term trading to be choppy at best, possibly until the next quarterly report due early February 2020.

As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.

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