Popular streaming service company Spotify Technology S.A. (SPOT - Get Rating) operates as a provider of audio streaming services globally. The company operates through the Premium segment, offering unlimited online and offline streaming access, and the Ad-Supported segment, providing on-demand online access. It is based in Luxembourg.

In the first quarter of 2022, SPOT added only two million Premium subscribers, one million lower than the expected three million net adds, to reach 182 million. The decline includes the 1.5 million Premium subscriptions loss due to the ceasing of operations in Russia. The stock plunged on the news.

SPOT’s stock has declined 53.5% in price year-to-date and 43.3% over the past three months. However, the stock gained 7.1% intraday to close yesterday’s trading session at $108.86.

Here are the factors that could affect SPOT’s performance in the near term.

Strong Bottomline Growth

For its fiscal first quarter ended March 31, SPOT’s revenue increased 23.9% year-over-year to €2.66 billion ($2.80 billion). Its gross profit rose 22.4% from the prior-year quarter to €671 million ($705.74 million). Its net income attributable to owners of the parent improved 469.6% from the same period the prior year to €131 million ($137.78 million). Its EPS attributable to owners of the parent came in at €0.21, up substantially from its negative year-ago value.

Mixed Valuations

In terms of its forward EV/Sales, SPOT is currently trading at 1.45x, which is 31% lower than the 2.10x industry average. However, the stock’s 1.72 forward Price/Sales multiple is 17.2% higher than the 1.47 industry average.

Mixed Analyst Sentiments

The consensus EPS estimate for the quarter ending June 2022 indicates a 181.8% year-over-year decrease. However, the $2.96 billion consensus revenue estimate for the same quarter reflects a 10.4% improvement from the prior-year quarter. Furthermore, the consensus EPS estimates for the quarter ending Sept. 30, 2022, and its fiscal year 2022 reflect a rise of 69.6% and 50%, respectively, from their prior-year periods. The consensus revenue estimate for the same periods of $3.12 billion and $12.27 billion, respectively, indicate 10% and 14.9% year-over-year increases.

Although the Street’s EPS estimate is expected to remain negative at least until fiscal 2022, its EPS is expected to increase 137.8% per annum over the next five years.

Lean Profit Margins

SPOT’s trailing 12-month gross profit margin and net income margin of 26.65% and 0.73%, respectively, are 47.66% and 86.48% lower than their respective industry averages of 50.93% and 5.37%.

Its trailing 12-month ROE, ROTC, and ROA of 2.75%, 1.04%, and 1.05%, respectively, are 61.06%, 73.27%, and 64.99% lower than their 7.05%, 3.89%, and 3.00% respective industry averages.

POWR Ratings

SPOT has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

SPOT has a Value and Sentiment grade of C, which is in sync with the stock’s mixed valuations and analyst sentiments.

In the 6-stock Entertainment – Radio industry, SPOT is ranked last. The industry is rated A.

Click here to see the additional POWR Ratings for SPOT (Growth, Momentum, Stability, and Quality).

View all the top-rated stocks in the Entertainment – Radio industry here.

Bottom Line

Although the company demonstrated sound financial growth in its last reported quarter, its lower-than-expected subscriber additions raise concerns about whether it is on the same trajectory as Netflix Inc. (NFLX) in terms of subscriber growth slowdown. Moreover, considering its lean profit margins, I think it might be wise to wait for a better entry point in the stock.

How Does Spotify Technology S.A. (SPOT) Stack Up Against its Peers?

While SPOT has an overall POWR Rating of C, one might consider looking at its industry peers, Townsquare Media, Inc. (TSQ - Get Rating) and Saga Communications, Inc. (SGA - Get Rating), which have an overall B (Buy) rating.

SPOT shares were trading at $109.00 per share on Tuesday afternoon, up $0.14 (+0.13%). Year-to-date, SPOT has declined -53.42%, versus a -12.33% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...

More Resources for the Stocks in this Article