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Buy Spotify (SPOT) Stock After Q4 Earnings On Streaming, Podcast Growth?

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Spotify (SPOT - Free Report) reported solid fourth-quarter earnings and revenue results and posted its first-ever positive operating income, net income, and free cash flow. Despite the positivity, shares of the streaming music powerhouse slid following its earnings release Wednesday.

Spotify now looks poised to expand its reach in a streaming age with two new acquisitions. So let’s see if SPOT stock might be worth buying on the dip with it set to expand in an increasingly decentralized entertainment age driven by the likes of Netflix (NFLX - Free Report) and Amazon (AMZN - Free Report) .

Q4 Overview  

Spotify said it posted a profit of €442 million, on €1.495 billion in revenue. The comparisons against our Zacks Consensus Estimates don’t matter as much because the conversion rates end up making things a bit confusing. What is important is that Spotify swung from a quarterly loss of €596 million in the year-ago period and saw its revenues surge 30% year over year and 11% sequentially.

Maybe more importantly, Spotify closed the quarter with 207 million monthly active users to top the high-end of its own 199 to 206 million MAU guidance. This also marked a 16 million MAU climb from Q3 and a 29% jump from the prior-year period. On top of that, Spotify’s vital premium subscriber count surged 36% year over year and 11% sequentially to reach 96 million.

Spotify is the world’s most popular paid music streaming service. The company currently reaches users in almost 80 countries, roughly a decade after it launched. SPOT’s 96 million paying subscribers nearly double Apple (AAPL - Free Report) Music’s roughly 50 million. But the iPhone giant’s streaming music offering didn’t launch until 2015.

As we mentioned at the top, shares of Spotify fell after the company reported its fourth quarter financial results. SPOT stock did pop roughly 1% through morning trading Friday to rest at $132.75 a share. This marked a 33% downturn from its 52-week high of $198.99 a share and could present a solid buying opportunity for those high on the streaming firm.

 

Outlook

Spotify said it will focus on growth over profitability and announced that it purchased two privately held podcast companies, Gimlet Media and Anchor. Spotify, which has dabbled in video content, has ramped up its investment and said it has plans to spend upwards of $500 million on podcast acquisitions in 2019 alone.

Spotify said that podcasts create impressive audience engagement and noted that people who listen to podcasts spend twice as much time using the platform. “Today audio is only one tenth of the size of the video market, so there is a massive opportunity here for audio to evolve into more personalized, more immersive experience, much like how the video industry has evolved,” Chief Executive Daniel Ek said on the company’s earnings call.

“We believe that over time more than 20% of all listening on Spotify will be non-music content and we strongly believe that this opportunity in audio starts with podcasts.”

Looking ahead, Spotify offered some cautious guidance. Right off the bat, it expects a loss of €200 to €360 million in 2019. On top of that, the company expects full-year sales growth between 21% and 29%. The high-end would fall in line with 2018’s full-year growth, which already marked a major slowdown from 2017’s 39% surge and 52% top-line expansion in 2016.

Spotify forecasts that it will reach between 117 and 127 million premium subscribers by the end of 2019, which compares with analysts’ average forecast of 121 million. Meanwhile, the company’s gross profit margin is expected to fall from 26.7% in the fourth quarter to between 22% and 25% in 2019. “We said we can and did become profitable and now we’re going back to investing,” Spotify’s CEO said.

Bottom Line

Spotify has been called the Netflix of music, and clearly the company has plans to expand its audio content reach far beyond that. But unlike Netflix, Amazon, and soon enough Disney (DIS - Free Report) , Apple, and AT&T (T - Free Report) , Spotify does not offer anything particularly unique. It offers, for the most part, the exact same music library as Apple Music and other premium streaming platforms. And most podcast producers put their podcasts in as many places as possible, including YouTube (GOOGL - Free Report) .

The simple fact is that Spotify will have a nearly impossible time becoming its own record company, while Netflix and Amazon Prime originals have become major forces in Hollywood. Plus, it seems that Spotify’s revenue growth is already slowing, which makes it less attractive. With that said, SPOT stock sits well below its 52-week high and is worth keeping an eye on.

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