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What Should Investors Do With Spotify (SPOT) Stock?

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Streaming music powerhouse Spotify (SPOT - Free Report) went public in early April and things have been up and down since then. So let’s dive into some key fundamentals to see what investors should do with Spotify stock.

Price Movement

Spotify stock officially opened at $165.90 per share, fluctuating briefly in afternoon trading before closing at $149.01 per share. This closing price valued Spotify at $26.5 billion, which ranked it as the eighth-largest tech IPO after one day of trading, directly behind Google and (GOOGL - Free Report) and Snap (SNAP - Free Report) , according to Dealogic. Since then, the stock has climbed as high as $171.23 per share and dipped as low as $135.51 per share.

 

Investors will see that shares of Spotify were up roughly 7% coming into Friday, which outpaces the S&P 500’s growth since the company went public. Shares of Spotify also climbed 1.56% through early afternoon trading on Friday to $160.16 per share.

Industry Overview

Moving beyond its recent price movement, investors should note that Spotify is a pioneer of the premium streaming music industry that has breathed new life into the music business. Today, Spotify is the industry leader that currently boasts 170 million monthly active users, which are broken down into two categories: premium and ad-supported.

Spotify claimed 99 million ad-supported users along with 75 million paying customers, with premium customers making up over 90% of its $1.37 billion Q1 revenues. The company’s premium users climbed 45% from the year-ago period, outpacing the free version’s growth of 21%—Spotify premium cost $9.99 a month.

When Spotify first launched it was one of only a few premium music streaming services. Now some of the biggest tech players in the world all have their own versions.

The much newer Apple (AAPL - Free Report) Music reportedly has 38 million subscribers—though CEO Tim Cook recently noted the service has 50 million users including people on a free trial. Apple’s service also costs $9.99 per month. Meanwhile, Amazon’s (AMZN - Free Report) premium streaming service called Music Unlimited, which is currently separate from Amazon’s widely popular Prime service, costs $7.99 a month for Prime members and $9.99 for non-prime members. The company last noted the service had “tens of millions" of paid customers.

Google is the latest tech giant to enter this booming business, with YouTube Music. There is a free, ad-supported version as well as YouTube Music Premium, which will also cost $9.99 a month. Lastly, not to be forgotten, Pandora (P - Free Report) claimed 72.3 million active listeners at the end of the first quarter. However, Pandora noted that its plus and premium subscribers totaled just 5.63 million.

What’s Next

Spotify is currently the leader, with millions of more users than the second largest streaming player, Apple Music. Yet, almost all of these services come at the exact same price point. And investors should remember that Spotify and the others currently have to pay a lot of money for music rights to the major record labels.

Spotify simply runs a very low margin business. And unlike Netflix (NFLX - Free Report) , which was able to take control of its future by creating its own movies and TV shows after the company saw its current content partners slowly pulling out to start their own services, Spotify will have a much harder time becoming its own record label.

Still, Spotify is a young company and is currently a Zacks Rank #3 (Hold) that is projected to see its full-year revenues reach $7.82 billion, which would mark a nearly 27% surge. Therefore, it seems like Spotify stock might be worth holding on to in order to see how the company is able to navigate its margin problems and its competition. 

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