Spotify Technology S.A.

SPOT Details

Spotify Technology S.A. (NYSE: SPOT) is a digital music streaming service that allows users to discover new releases, such as the most recent singles and albums, playlists selected by music fans and professionals, and millions of songs. They can also listen to music, discover new artists, and make playlists. Both Spotify Premium and Spotify Free offer shuffle play, ad-free listening, unlimited skips, offline listening, the ability to play any song, and high-quality audio.

Q1FY22 Results:

• Solid Revenues Performance: SPOT's revenues increased 23.94% to EUR 2.66 billion in Q1FY22 (ended March 31, 2022) from EUR 2.15 billion in Q1FY21, attributable to YoY growth of 18.54% in Monthly Active Users.
• Surge in Net Income: Its net income (attributable to parent) was EUR 131 million during Q1FY22, increased from EUR 23 million during Q1FY21.
• Leveraged Balance Sheet: The company ended the quarter with a cash position of EUR 3.54 billion (including short-term investments) and total debt (including exchange notes and lease liabilities) of EUR 1.73 billion.
• Growth in Premium Subscribers: In Q1FY21, SPOT’s premium subscribers increased to 182 million in Q1FY22 from 158 million in Q1FY21.
• Decline in ARPU: In Q1FY22, the Premium average revenue per user (ARPU) was EUR 4.38 vs. EUR 4.12 in Q1FY21.

Key Risk:

• Voting Concentration Risk: As of December 31, 2021, the company's founders, Daniel Ek and Martin Lorentzon, held 31.90% and 42.50% of the total voting power in the company, respectively, thus controlling all matters requiring shareholder approval, hence constraining ability other shareholders to influence corporate decisions.

Outlook:

• Financial Metrics: As of April 27, 2022, SPOT expects to clock total revenue of EUR 2.80 billion along with gross margin of 25.2% in Q2FY22. It also expects an Operating Profit/Loss of EUR (197) million.
• Operating Metrics: In Q2FY22, SPOT anticipates achieving MAU to the tune of 428 million comprising of Total Premium Subscribers of 187 million.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

SPOT's stock price has fallen 49.76% in the past nine months and is currently leaning towards the lower end of its 52-week range of USD 95.22 to USD 305.60. We have valued the stock using the EV/Sales-based relative valuation methodology and arrived at a target price of USD 133.93.

Considering the significant correction in the stock price, leader in the music streaming industry, growth in premium subscribers, robust topline performance, encouraging outlook, associated risks, and current valuation. We recommend a "Buy" rating on the stock at the closing price of USD 109.49, up 0.58% as of May 03, 2022.

Three-Year Technical Price Chart (May 03, 2022). Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary:

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Note 3: The report publishing date is as per the Pacific Time Zone.