Spotify (SPOT - Free Report) stock has failed to live up to the hype since the streaming music powerhouse went public in the spring of 2018 and its shares have tumbled over the last three months. Nonetheless, the company has expanded its paid subscriber base in the ever-growing streaming music market.
Yet Wall Street and traders still fear that Spotify’s much larger tech titan peers, including Apple (AAPL - Free Report) and (AMZN - Free Report) , make life too hard.
Spotify began trading in early April of last year, over a decade after the Stockholm-headquartered firm began to reshape the modern music industry. For years, the music business feared that illegal music downloads meant doom. Today, the CD is all but dead too many, with Best Buy (BBY - Free Report) and others slowly limiting sales, and the resurgence of vinyl records remains mostly niche.
However, thanks to the success of paid and ad-supported music streaming services such as Spotify, the U.S. recorded music business posted its third straight year of revenue growth in 2018, after years of declines. In fact, streaming represented roughly 80% of recorded music sales, according to industry reports. And Spotify is the world’s largest streaming music company.
Spotify boasts a total of 232 million global monthly active users. The firm saw its premium subscriber base surge 31% in the second quarter of 2019 and 9% sequentially to reach 108 million. Meanwhile, its ad-supported tier popped 27% and 5%, respectively, to 129 million. Spotify’s biggest challenger, Apple Music, reportedly has 60 million paying subscribers. Interestingly, Apple has not tired to undercut Spotify.
Netflix and Apple both offer the exact same set of plans at the same costs: premium plan at $9.99 per month, family plans at $14.99/mo., and student plans for $4.99/mo.
Amazon Music—which is not included as part of Prime, unlike Netflix (NFLX - Free Report) competitor Prime Video—is much smaller, at approximately 32 million subscribers. With that said, Amazon’s figures are often ballpark estimates, but it is worth noting that Amazon has beefed up its advertising push for music recently. Google’s (GOOGL - Free Report) YouTube and Pandora (owned by Sirius XM Holdings Inc. (SIRI - Free Report) are part of a larger group of third-tier players.
As we can see in the chart above, SPOT stock is down roughly 22% since going public. Its decline largely tracked the broader Technology Services market’s average decline during this stretch, until recently. Shares of Spotify have fallen roughly 22% in the past three months, against its industry’s 7% slide and the S&P 500’s 1% downturn.
Investors will also see that SPOT stock is trading at 2.3X forward 12-month Zacks sales estimates. This marks a slight premium against its industry’s average but represents a discount compared to its own 3.2X median and 4.9X high. Some of its valuation improvement is based on its recent decline, but not all of it.
Q3 Outlook & Beyond
Spotify’s third-quarter fiscal 2019 revenue is projected to jump 19.6% from the prior-year quarter to reach $1.88 billion, based on our Zacks Consensus Estimate (Spotify reports its sales in euros). This would come up short of Q2’s 23.4% revenue expansion in U.S. dollar figures.
Peeking ahead, SPOT’s full-year fiscal 2019 revenue is projected to surge 26% to reach $7.45 billion, with 2020 projected to come in 24.4% higher at $9.27 billion.
At the bottom end of the income statement, the firm’s adjusted quarterly earnings are projected to tumble from +$0.27 per share in Q3 2018 to -$0.40. Spotify’s full-year earnings are expected to sink from -$0.60 to -$2.19 a share. Then, peeking ahead, SPOT’s fiscal 2020 adjusted EPS figure is projected to improve significantly down to a loss of -$1.47 a share.
Spotify executives remain committed to growth and technology improvements in order to attract and retain users. Despite Spotify’s projected losses, the company has seen its earnings estimate revisions picture trend in the right direction recently. “I think overall, we're still, to level set, in the growth phase of the business and very early on, as I mentioned in my opening remarks, of the streaming audio market,” CEO Daniel Ek said on the company’s Q2 earnings call.
Spotify’s upward earnings revisions trends help the firm earn a Zacks Rank #1 (Strong Buy) at the moment, along with an “A” grade for Momentum in our Style Score system. The company is also part of an industry that currently ranks in the top 24% of our 255 Zacks industries.
Spotify stock closed regular trading Tuesday at $115.08 per share, down 31% off its 52-week highs. This could give the stock some room to run and help make it more attractive in an expanding streaming music space.
The subscription-based business model has not been all that successful of a pitch on Wall Street recently. And the company does face major competition from companies that don’t blink at the music royalty fees, which won’t ever go away.
Spotify is set to report its Q3 2019 financial results on Monday, October 28. And investors must pay close attention to paid subscriber growth figures and updates on its efforts to expand its podcast business.
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