Spotify Stock Rises 83% Year to Date: Is Your FOMO Warranted?

Spotify Technology S.A. SPOT has seen its stock skyrocket 83% year to date, significantly outperforming the 23.4% rally of the industry.

As of the last trading session, the stock closed at $343.97, close to its 52-week high of $359.38. SPOT is trading above its 50-day moving average, indicating a bullish sentiment among investors.

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Given the continuous strength in SPOT shares, investors may wonder if there is still an opportunity to invest in the stock. Let's take a closer look.

SPOT's Strong Growth Driven by Price Hikes, Podcast Gains

Spotify investors have many reasons to be optimistic when it comes to the company's financial results. Its 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%.

Premium subscribers grew 12%, and ad-supported monthly active users (MAUs) increased 15% in the second quarter of 2024. The growth in total MAU was also noteworthy, with a 14% year-over-year increase. 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.

Spotify's performance has 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 recent price hikes, alongside those by competitors such as Alphabet's GOOGL YouTube Premium, Apple's Music/TV and Amazon's Music Unlimited, underscore the industry's trend toward higher pricing.

Spotify is further expanding its content portfolio, aiming for a larger portion of its revenues to come from its podcasts and audiobooks. By boosting revenue from these high-margin content initiatives, Spotify could enhance its profitability, even if record labels take a tougher stance in negotiations. The profitability of podcasts is also on the rise, as the company shifts its strategy from using content investments primarily for subscriber growth to focusing on monetization.

By the second quarter of 2024, Spotify hosts over 250,000 video podcast shows, with more than 170 million users having watched a video podcast on the platform.

SPOT Stock is Still Cheap

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 4.53X compared to the industry average of 8.76X. The trailing 12-month enterprise value/sales ratio stands at 3.95X compared to the industry average of 8.44X.

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Furthermore, the Relative Strength Index shows no significant signs of overbought conditions, suggesting the stock isn't overextended.

Spotify Relative Strength Index

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SPOT has a Strong Liquidity Position

SPOT's liquidity position is robust, with a current ratio of 1.56 at the end of the second quarter of 2024 compared to the industry's 1.02. This robust liquidity reflects SPOT's ability to cover its immediate liabilities without strain, indicating financial stability and operational flexibility.

Analysts' Confidence Reflected in Rising Estimates

Seven estimates for the third quarter of 2024 moved upward over the past 60 days versus no downward revision. Over the same period, the Zacks Consensus Estimate for third-quarter 2024 earnings has increased 32.6% to $1.83. Earnings are expected to grow 408.3% year over year in the quarter.

Eight 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 26.2% to $6.31. Earnings are expected to grow 313.9% 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.

Spotify is a Must-Buy

Given its solid fundamentals, undervaluation, and bullish momentum, Spotify is a must-buy for investors looking to capitalize on the growth of the music-streaming and podcasting sectors. Management anticipates a sequential increase of 13 million in total MAUs, a 5 million rise in total premium subscribers, a $193 million revenue boost, a 100 basis point expansion in gross margin, and a $139 million increase in operating income for the third quarter. So, now is an ideal time to invest before further appreciation solidifies SPOT's position as a market leader.

SPOT currently sports a Zacks Rank #1 (Strong Buy).

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