Is this streaming company a buy?

It’s time to explore a popular streaming name. Here is the break down of $SPOT, otherwise known as Spotify.

Current Price: $247.97

52/Wk High: $387.44

52/Wk Low: $211.10

Market Cap: $47.2 Billion

Performance 3 Month: -17.27%

Read below for the break down!

Spotify ($SPOT) is a leading digital audio company that offers digital music and audio streaming services to customers through a simple mobile and online platform.

The company provides users with the ability to discover new music and podcasts, create or listen to playlists, develop personal audio collections, and more.

Sifting through Spotify’s offerings the company has multiple paid and unpaid plans including Spotify Premium, which provides users with a bevy of features that simplify and enhance the audio listening process.

Spotify is led by founder, CEO, and Chairman Daniel Ek. Ek founded Spotify in 2006 and has since built the company into an audio streaming leader.

The management team and board of directors are made up of leaders with prior experience from the likes of Pandora, Netflix, Barclays, and Yahoo.

On the acquisition front, Spotify has been making major investments in the future of audio streaming. In November Spotify acquired Megaphone, a leading podcast advertising, and publishing platform.

Leadership was upbeat about the acquisition.

“The acquisition of Megaphone represents the next step in Spotify’s expanding the possibilities of this intimate and screenless medium,” the company said in a statement.

Shortly after acquiring Megaphone Spotify went on to acquire Betty Labs, the creator of Locker Room, which is a live audio platform that revolutionizes the conversation about sports between fans and industry insiders.

The company was excited about the acquisition.

“Creators and fans have been asking for live formats on Spotify, and we’re excited that soon, we’ll make them available to hundreds of millions of listeners and millions of creators on our platform,” CFO Gustav Soderstrom said.

The company is continually launching new additions to both the creator and listener side of their platform as well. In February Spotify launched the Spotify Audience Network which will provide users with an audio advertising marketplace that connects advertisers to listeners.

Furthermore, the company announced multiple partnerships with Anchor, WordPress, and FaceBook. Spotify partnered with both Anchor and WordPress to enhance opportunities for creators and launch a bevy of new features such as blog to podcast conversion.

Spotify’s partnership with FaceBook on the other hand creates an “integrated ecosystem with a mini player experience” which will allow FaceBook users to listen to Spotify content directly through the FaceBook platform.

Rounding out recent announcements, Spotify expanded onto other platforms such as Apple Tv, LG products, Sony consoles, and more. The company also launched Car Thing, a smart player that provides users with the ability to enjoy Spotify through their car.

Shifting into Spotify’s growth, the company is gaining ground on the competition. In fact, by 2022 Spotify is expected to have 33.1 million podcast listeners, much greater than Apple which is projected to achieve 28.5 million podcast listeners according to eMarketer.

Spotify continues to sign major deals with leading creators as well, including Joe Rogan, Alex Cooper, Addison Rae, DC Comics, Michelle Obama, Kim Kardashian, and more. In total, Spotify launched 55 new O&E podcasts in Q1 internationally.

Overall, Spotify finished the quarter with 2.6 million podcasts on the platform, representing a strong increase from the 2.2 million podcasts in Q4.

Digging into the numbers, Spotify beat Q1 2021 expectations with an EPS of €-0.25, better than the analyst’s EPS consensus estimate of €-0.34. On a year-over-year basis, EPS declined by 25%.

Shifting into revenues, total revenue landed at €2.147 billion in Q1, representing a strong 16% increase in total revenue on a year-over-year basis. On the downside, total revenue slid by 1% quarter-over-quarter.

Breaking down revenues, Premium revenue totaled €1.931 billion representing 14% growth in Premium revenues on a year-over-year basis.

Rounding out revenues, Ad-Supported revenue totaled €216 million, representing 46% growth in Ad-Supported revenue on a year-over-year basis. Do note that while Premium revenue increased by 2% Q/Q, Ad-Supported revenue declined by 23% Q/Q.

Expanding on the Premium segment, Premium average revenue per user (ARPU) declined by 7% year-over-year to €4.12.

Shifting into profits, Spotify delivered €548 million in gross profit, representing a strong 16% year-over-year jump in total gross profit. While gross profit improved, gross margin remained flat year-over-year at 25.5%.

On the expenses front, operating expenses totaled €534 million, representing an increase of 9% year-over-year. The jump in expenses was driven by marketing expenses and share-based compensation.

Income continued to accelerate throughout the quarter as well, with Q1 operating income totaling €14 million versus the lower Q1 2020 operating income level of €-17 million. Operating margin improved along with operating income, jumping from -0.9% in 2020 to 0.7% in 2021.

Digging into margins by segment, Premium gross margin declined by 42 basis points to 27.9% while Ad-Supported gross margin improved by 1,100 basis points to 4.4%.

Rounding out the first-quarter financials, free cash flow improved significantly, moving from a lower €-21 million to a better €41 million. On a final cash flow note, free cash flow declined by 39% Q/Q.

Shifting into Q1 user data, monthly active users (MAUs) totaled 356 million, representing a 24% increase in MAUs year-over-year. Breaking down Spotify’s user base, Subscription Subscribers increased by 21% Y/Y to 158 million while Ad-Supported MAUs improved by 27% to 208 million.

Expanding on Spotify’s user base, 24% of users are in North America, 34% Europe, 22% Latin America, and 20% spread amongst other regions.

Leadership was upbeat about the quarter.

“I am more confident than ever in our ability to deliver on our ambition to become the world’s number one audio platform,” CEO Daniel Ek said.

Looking to the future, management is expecting MAUs to total 366-373 million in Q2 and revenues to land within a range of €2.16 billion to €2.36 billion.

Guiding the full year, leadership expects MAUs to land within a range of 402 million to 422 million users and for revenue to land within a range of €9.11 billion to €9.51 billion.

Shifting into the balance sheet the numbers are solid.

Total Debt: €1.816 Billion

Total Liabilities: €4.793 Billion

Total Assets: €8.037 Billion

Cash & Short Term Inv: €3.086 Billion

On a valuation basis, Spotify does trade at a premium.

Price to Sales: 4.98x

Price to Book: 12.61x

Price to Cash Flow: 191.59x

Management could be more effective.

Return on Equity: -21.27%

Return on Assets: -8.56%

Return on Invested Capital: -14.36%

Given the numbers the analysts are bullish with a mean price target of $340.91/share, representing a 37.48% upside.

The high price target is $428.00/share, representing a 72.60% gain, while the low price target is $262.00/share, representing a 5.66% upside.

The big money is quite involved with 59.20% of Spotify being owned by institutions. Top holders include Baillie Gifford & Co., Tencent Holdings, and Morgan Stanley Investment Management.

On a technical basis, Spotify could be presenting an opportunity. According to the six-month charts the MACD is moving with downside momentum within a range of 4.31 down to 2.17.

The six-month charts are also indicating an RSI of 42.86 and CCI of -88.56, both of which are trending lower.

The bears fear Spotify will lack what it takes to compete against strong competition from the likes of Amazon, Apple, and others, while the bulls believe Spotify has plenty of room for growth and that leadership can navigate the competitive giants.

In short, Spotify ($SPOT) is a solid long-term audio streaming pick with expanding revenues, subscribers, and gross margins, along with a reliable management team and solid balance sheet.

EAT - SLEEP - PROFIT

Disclaimer: This is not direct financial advice, simply an opinion based on independent research.