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blue-chip

Two US-Listed Communication Services Majors in the Buy Zone - SPOT, DISCA

Dec 17, 2021 | Team Kalkine
Two US-Listed Communication Services Majors in the Buy Zone - SPOT, DISCA

Spotify Technology S.A.

SPOT Details

 

Spotify Technology S.A. (NYSE: SPOT) is a Luxembourg-based music streaming service provider in 178 countries and territories, with plans to expand to 85 more countries and areas in Asia, Africa, the Caribbean, Europe, and Latin America in February 2021. Its platform had 381 million monthly active users (MAUs) and 172 million Premium subscribers as of September 30, 2021. Subscriptions and advertising are now employed to monetize the company's services.

Latest News:

  • Extension of Contracts: On November 18, 2021, cbdMD, Inc., one of the leading cannabidiol (CBD) company, revealed that it had secured a contract extension with SPOT and Joe Rogan Experience (JRE) for an advertising collaboration. JRE is a podcast that bridges product approval and its actual use.
  • Acquisition of Findaway: On November 11, 2021, SPOT announced that it had reached a definitive contract to acquire Findaway, a global leader in digital audiobook distribution. The transaction's terms, however, were not made public. SPOT will be able to transform the music and podcast industries and drive content to enormous audiences throughout the world due to this acquisition.

9MFY21 Results:

  • Progress in Revenues: SPOT's revenues climbed 22.18% to EUR 6.98 billion in 9MFY21 (ended September 30, 2021) from EUR 5.71 billion in 9MFY20, due to a premium membership rise in the number of music publications sold.
  • Growth in Bottomline: Its net income (attributable to parent) was EUR 5.00 million during 9MFY21, compared to a loss of EUR 456 million during 9MFY20.
  • Leveraged Balance Sheet: The company ended the quarter with a cash position of EUR 3.24 billion (including short-term investments) and total debt (including exchange notes and lease liabilities) of EUR 1.76 billion.
  • Fall in ARPU: During 9MFY21, the Premium average revenue per user (ARPU) was EUR 4.25, compared to EUR 4.33 in 9MFY20.

Key Risks:

  • Voting Concentration Risk: As of December 31, 2020, the company's founders, Daniel Ek and Martin Lorentzon, held 33.50% and 41.90% of the total voting power in the company, respectively, and hence control all items requiring shareholder approval. As a result of the concentration of ownership and voting power, other shareholders' ability to influence company operations is constrained.

Outlook:

  • MAUs and Premium Customer Estimates: According to the company's projections as of October 27, 2021, total MAUs for Q4FY21 will range between 400 and 407 million, with 177 to 181 million premium users.
  • Topline and Operating Loss Estimates: Revenues are expected to range between EUR 2.54 and EUR 2.68 billion, with an operating loss of EUR 152 to EUR 72 million.

 

Valuation Methodology: EV/Sales Multiple Based Relative Valuation

 

(Analysis by Kalkine Group)

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

SPOT Daily Technical Chart (Source: REFINITIV)

Stock Recommendation:

SPOT's share price has fallen 17.10% in the past month and is currently leaning towards lower band of its 52-week range of USD 201.68 to USD 387.44. The stock is currently trading below its 50 and 200 DMA levels, and its RSI Index is at 36.59. We have valued the stock using the EV/Sales-based relative valuation methodology and arrived at a target price of USD 270.70.

Considering the correction in the stock price in the past month, market dominance in the music streaming industry, recent acquisition, and current valuation, we recommend a "Buy" rating on the stock at the current price of USD 225.46, down 0.48% as of December 17, 2021, at 10:23 AM ET.

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.

* Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

 

Discovery, Inc.

DISCA Details

Discovery, Inc. (NASDAQ: DISCA) is a global media company that distributes content via various platforms, including linear platforms like pay-TV, free-to-air, and broadcast television, authenticated GO applications, digital distribution agreements, content licensing agreements, and direct-to-consumer (DTC) subscription products. It had 20 million paid DTC subscribers as of September 30, 2021. In roughly 50 languages, it provides tailored content in the United States and over 220 additional countries and territories.

Latest News:

  • Now Available on VIZIO SmartCast: Discovery+, a non-fiction, real-life subscription streaming service, is available to millions of VIZIO SmartCast customers, according to DISCA and VIZIO, an American firm that manufactures and sells televisions, soundbars, and viewer data, on December 16, 2021.
  • Collaboration with SiriusXM: SiriusXM, a leading audio entertainment provider in North America, and DISCA announced a partnership on December 15, 2021, to provide consumers with additional value through subscription options that deliver the most effective content from both companies. Platinum VIP SiriusXM members will receive a 12-month subscription to discovery+.

9MFY21 Results:

  • Growth in Revenues: The company's total revenues increased by 15.66% during 9MFY21 (ended September 30, 2021) to USD 9.00 billion from USD 7.79 billion during 9MFY20, due to an increase in both advertising and distribution revenues.
  • Development in Net Income: DISCA witnessed an increase in net income to USD 1.11 billion during 9MFY21 from USD 1.04 billion reported during 9MFY20.
  • Leveraged Balance Sheet: As of September 30, 2021, the company's cash and cash equivalents stood at USD 3.12 billion, with total debt of USD 14.79 billion.

Key Risks:

  • Distributor Concentration Risk: The top ten distributors account for 95% of the company's distribution revenue in the US Networks division. Although the company strives to renew its agreements with its distributors before they expire, a delay in securing a renewal that causes a service disruption, a failure to secure a regeneration or a renewal on less favorable terms, could have a material adverse impact on the company's financials and cash flows.
  • Currency Fluctuation Risk: DISCA has significant operations in various international jurisdictions, with some of its transactions taking place in foreign currencies. As a result, it is exposed to foreign currency risk because it conducts business and invests in various currencies.

Valuation Methodology: Price/Earnings Per Share Multiple Based Relative Valuation

(Analysis by Kalkine Group)

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

DISCA Daily Technical Chart (Source: REFINITIV)

Stock Recommendation:

DISCA's stock price has fallen 69.92% in the past nine months and is currently trading in the lower-band of its 52-week range of USD 21.66 to USD 78.14. The stock is currently trading below its 50 and 200 DMA levels, and its RSI Index is at 41.89. We have valued the stock using the Price/Earnings-based relative valuation methodology and arrived at a target price of USD 28.35.

Considering the correction in the stock price, dominance in Media space, decent balance sheet, and current valuation, we recommend a "Buy" rating on the stock at the current price of USD 23.21, down 0.85% as of December 17, 2021, 12:04 PM ET.

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.