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Evaluating Spotify (SPOT) Stock Six Months After IPO

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Spotify (SPOT - Free Report) went public in early April at a time when subscription-based streaming was mainstream, and maybe that’s the problem. Amid increased competition from Apple (AAPL - Free Report) Music in the U.S., along with competing services from other tech powerhouses, let’s dive into Spotify to see what investors should make of the company roughly six months after its IPO.

Overview

Spotify closed its first day of trading on April 3 at $149.01 per share. The company’s first day landed the firm a market value of $26.54 billion, which helped it become the eighth-largest tech IPO after one day of trading, right behind Google (GOOGL - Free Report) in 2004. Shares of SPOT surged for the next four months to close at over $192 per share in late August. Since then, Spotify stock has fallen back down toward its April prices.

 

The company, which is the world’s largest paid music service, closed the second quarter with a monthly active user base of 180 million, up 30% from the year-ago period. SPOT’s ad-supported MAUs surged 23% to 101 million. More importantly, Spotify’s premium subscribers soared 40% from the year-ago period and 10% sequentially to close the quarter at 83 million.

Spotify’s premium user growth is key since these members accounted for roughly 90% of the firm’s total revenues last quarter. It is worth noting that the streaming company’s total quarterly revenues climbed 26% to 1.27 billion euros.

The company did report an operating loss of 90 million euros. But Spotify’s user growth will likely remain a Wall Street focus for some time. (The chart below comes from Spotify’s Q2 earnings statement.)

 

News

MKM Partners analyst Rob Sanderson maintained a “Buy” rating for Spotify stock earlier this week. The analyst also reiterated his $245 price target, which represented a roughly 64% upside to Wednesday’s closing price of $149.48 per share. Sanderson cited Spotify’s ability to scale to hundreds of millions of users, along with its ability to collect data, as major reasons for his positivity.

Spotify and Samsung announced in August a partnership that makes the firm Samsung's “new go-to music service provider.” The Spotify app is made available to customers when they set up their Samsung phones. The streaming service is also integrated into Samsung’s smart TVs and other devices.

The Stockholm, Sweden-based company will also see its service intergraded into Samsung’s new Galaxy Home smart speaker, which hopes to take on Apple’s HomePod, Amazon’s (AMZN - Free Report) Echo, and Google’s Home. Spotify’s Samsung deal came just a day after Verizon (VZ - Free Report) partnered with Apple to give its “Unlimited” customers free access to Apple Music for six months.

Competition & Problems

This brings us to what could be Spotify’s biggest problem: competition. Some called Spotify the next Netflix (NFLX - Free Report) . But aside from the fact that they are both hugely popular streaming platforms, with massive paid monthly subscriber bases, there is little to compare.

First off, Spotify will likely never be able to become its own record label. Therefore, it will always pay large royalty fees. And unlike the competition between Netflix, Amazon Prime Video, Hulu, and soon enough Disney (DIS - Free Report) , Apple, and AT&T (T - Free Report) , which all offer unique TV shows and movies, Spotify and Apple Music offer, for the most part, the same library of music (also read: Should Netflix & Amazon Fear AT&T's New Streaming TV Service?).

There are already reports that Apple Music surpassed Spotify in the U.S. Meanwhile, Amazon’s Music Unlimited and Google's YouTube Music are both newer threats. These companies all have to pay artists and record labels, but they just have much more money to do so.

Outlook

Looking ahead, Spotify expects its MAU total to climb between 25% and 29% to reach 188 million to 193 million in the third quarter. The firm also expects its total premium subscribers to climb between 36% and 43% to reach between 85 million and 88 million. Plus, Spotify expects to see its premium subscriber base climb by as much as 37% in fiscal 2018 to climb as high as 97 million.

Spotify, which is currently a Zacks Rank #3 (Hold), is scheduled to report its Q3 financial results on November 1.

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