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Is Spotify (SPOT) Stock Worth Buying After Mixed Q2 Show?
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Spotify Technology S.A. (SPOT - Free Report) reported its second-quarter 2024 results last week, but the stock hasn’t moved much since then. However, it's worth noting that the stock has already gained an impressive 75.1% year to date, significantly outperforming the industry’s 16.4% rally.
The quarterly results were mixed, with earnings beating while revenues missing estimates. Nonetheless, both top and bottom-line growth rates were robust. Total revenues saw a 20% year-over-year increase, driven by a 21% rise in premium revenues and a 13% increase in ad-supported revenue.
Image Source: Zacks Investment Research
The growth in total monthly active users (MAU) was also noteworthy, with a 14% year-over-year increase. Premium subscribers grew 12%, and ad-supported MAUs increased 15%. Ad-supported streaming services, podcasts and enhancements in user experience largely fueled the double-digit growth. The premium average revenue per user grew by 8%, reflecting the benefits of price increases.
Spotify increased its gross profit by 45% year over year, expanding its gross margin by 510 basis points. It also turned an operating loss of $247 million into a profit of $266 million over the year. The adjusted eps of $1.43 marked a substantial 184.6% year-over-year jump.
So, what’s going on with the company? What are the key takeaways from its call transcript? And is the stock a bargain now? Here’s everything you should know if you are considering parking your money in SPOT.
Prices and Subscribers are Increasing Simultaneously
Spotify's performance metrics have been bolstered by sustained price hikes, a loyal consumer base and significant cost reductions. The ability to raise prices while retaining and expanding its subscriber base is particularly noteworthy. This was the first quarter where premium subscriber growth outpaced ad-supported MAU growth sequentially, highlighting the effectiveness of Spotify’s pricing strategy.
The company's premium subscriber revenues, which account for approximately 88% of total revenues, play a crucial role in its financial performance. Ad-supported revenues contribute the remaining 12%. The recent price hikes, alongside those by competitors such as Alphabet's (GOOGL - Free Report) YouTube Premium, Apple’s (AAPL - Free Report) Music/TV, and Amazon’s (AMZN - Free Report) Music Unlimited, underscore the industry's trend towards higher pricing.
Stock Valuation: A Relative Bargain
Despite the significant rally over the past year, Spotify's stock remains relatively undervalued, suggesting potential for further appreciation. The stock is trading at a trailing 12-month price/sales ratio of 4.35X compared to the industry average of 9.12X.
Image Source: Zacks Investment Research
The trailing 12-month enterprise value/sales ratio stands at 3.83X compared to the industry average of 8.61X.
Image Source: Zacks Investment Research
Analysts are Optimistic
Six estimates for the third quarter of 2024 moved north over the past 60 days versus no southward revision. Over the same period, the Zacks Consensus Estimate for third-quarter 2024 earnings has increased 30% to $1.74. Earnings are expected to grow 383.3% year over year in the quarter. Six estimates for 2024 moved north over the past 60 days versus no southward revision. Over the same period, the consensus estimate for 2024 earnings has increased 23.3% to $6.08. Earnings are expected to grow 306.1% year over year in 2024.
The Zacks Consensus Estimate for SPOT’s third quarter 2024 sales stands at $4.38 billion, suggesting year-over-year growth of 19.8%. Revenues for 2024 are expected to increase 19.4% year over year.
Buy SPOT for Expected Price Increase?
Spotify's robust financial health, strong top and bottom-line growth prospects, and ability to balance higher subscription pricing with MAU growth make it an attractive investment. Management’s expectations for the third quarter include a 13 million sequential increase in total MAUs, a 5 million increase in total premium subscribers, a $193 million rise in revenues, a 100 basis points expansion in gross margin, and a $139 million rise in operating income.
For investors seeking exposure to the music-streaming sector, Spotify’s promising outlook and financial stability make it a compelling choice during this earnings season. The inherent growth potential and strategic initiatives suggest that Spotify remains a valuable investment opportunity.
Image: Bigstock
Is Spotify (SPOT) Stock Worth Buying After Mixed Q2 Show?
Spotify Technology S.A. (SPOT - Free Report) reported its second-quarter 2024 results last week, but the stock hasn’t moved much since then. However, it's worth noting that the stock has already gained an impressive 75.1% year to date, significantly outperforming the industry’s 16.4% rally.
The quarterly results were mixed, with earnings beating while revenues missing estimates. Nonetheless, both top and bottom-line growth rates were robust. Total revenues saw a 20% year-over-year increase, driven by a 21% rise in premium revenues and a 13% increase in ad-supported revenue.
The growth in total monthly active users (MAU) was also noteworthy, with a 14% year-over-year increase. Premium subscribers grew 12%, and ad-supported MAUs increased 15%. Ad-supported streaming services, podcasts and enhancements in user experience largely fueled the double-digit growth. The premium average revenue per user grew by 8%, reflecting the benefits of price increases.
Spotify increased its gross profit by 45% year over year, expanding its gross margin by 510 basis points. It also turned an operating loss of $247 million into a profit of $266 million over the year. The adjusted eps of $1.43 marked a substantial 184.6% year-over-year jump.
So, what’s going on with the company? What are the key takeaways from its call transcript? And is the stock a bargain now? Here’s everything you should know if you are considering parking your money in SPOT.
Prices and Subscribers are Increasing Simultaneously
Spotify's performance metrics have been bolstered by sustained price hikes, a loyal consumer base and significant cost reductions. The ability to raise prices while retaining and expanding its subscriber base is particularly noteworthy. This was the first quarter where premium subscriber growth outpaced ad-supported MAU growth sequentially, highlighting the effectiveness of Spotify’s pricing strategy.
The company's premium subscriber revenues, which account for approximately 88% of total revenues, play a crucial role in its financial performance. Ad-supported revenues contribute the remaining 12%. The recent price hikes, alongside those by competitors such as Alphabet's (GOOGL - Free Report) YouTube Premium, Apple’s (AAPL - Free Report) Music/TV, and Amazon’s (AMZN - Free Report) Music Unlimited, underscore the industry's trend towards higher pricing.
Stock Valuation: A Relative Bargain
Despite the significant rally over the past year, Spotify's stock remains relatively undervalued, suggesting potential for further appreciation. The stock is trading at a trailing 12-month price/sales ratio of 4.35X compared to the industry average of 9.12X.
The trailing 12-month enterprise value/sales ratio stands at 3.83X compared to the industry average of 8.61X.
Analysts are Optimistic
Six estimates for the third quarter of 2024 moved north over the past 60 days versus no southward revision. Over the same period, the Zacks Consensus Estimate for third-quarter 2024 earnings has increased 30% to $1.74. Earnings are expected to grow 383.3% year over year in the quarter. Six estimates for 2024 moved north over the past 60 days versus no southward revision. Over the same period, the consensus estimate for 2024 earnings has increased 23.3% to $6.08. Earnings are expected to grow 306.1% year over year in 2024.
The Zacks Consensus Estimate for SPOT’s third quarter 2024 sales stands at $4.38 billion, suggesting year-over-year growth of 19.8%. Revenues for 2024 are expected to increase 19.4% year over year.
Buy SPOT for Expected Price Increase?
Spotify's robust financial health, strong top and bottom-line growth prospects, and ability to balance higher subscription pricing with MAU growth make it an attractive investment. Management’s expectations for the third quarter include a 13 million sequential increase in total MAUs, a 5 million increase in total premium subscribers, a $193 million rise in revenues, a 100 basis points expansion in gross margin, and a $139 million rise in operating income.
For investors seeking exposure to the music-streaming sector, Spotify’s promising outlook and financial stability make it a compelling choice during this earnings season. The inherent growth potential and strategic initiatives suggest that Spotify remains a valuable investment opportunity.
SPOT currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.