Spotify Technology SA

Spotify Technology SA (NYSE: SPOT) is a corporation located in Luxembourg that provides digital music streaming services.

Key Highlights for the Q1 FY22

• Spotify acquired Podsights and Chartable on February 16, 2022, to advance podcast measurement for advertisers and insights for publishers.
• In Q1, the firm expanded the number of artists and labels who may develop Sponsored Recommendations by allowing all qualifying musicians in the United States to use its self-serve campaign management platform. Therefore, the firm has increased the number of new clients while maintaining an 85 percent customer retention rate.
• Spotify announced a long-term collaboration with FC Barcelona on March 15th, in which Spotify will become the club's Main Partner and Official Audio Streaming Partner.

Important financials from the Q1 FY22 results

• Total MAUs increased 19 percent year over year to 422 million in the third quarter, up from 406 million the previous quarter and exceeding the company's expectations by 4 million.
• In Q1, the revenue of EUR 2,661 million increased 24 percent year over year (or 19 percent in constant currency) and was above the company's target.
• Premium Revenue increased by 23% year over year to EUR 2,379 million (or 18% in constant currency). In Q1, Premium's average revenue per user ("ARPU") of EUR 4.38 was increased by 6% year over year (or 3% year over year in constant currency).
• Ad-Supported Revenue increased by 31% year over year to EUR 282 million (or 22% in constant currency). Ad-Supported Revenue (11 percent of Total Revenue) was at an all-time high in the first quarter, with robust year-over-year growth across all geographies and channels.
• In Q1, gross margin came in at 25.2 percent, slightly over forecast and down 29 basis points year over year. The excellent Y/Y Gross Margin trend reflected a favorable revenue mix shift towards podcasts and increased marketplace activity, while Operating Expenses totaled EUR 677 million in Q1, up 27% Y/Y and slightly higher than expected due to higher staff costs.
• In the first quarter, free cash flow was EUR 22 million, down EUR 19 million years over year owing to adverse adjustments in net working capital because of increased licensor payments.
• Spotify's liquidity situation was robust at the end of the first quarter, with EUR 3.6 billion in cash and cash equivalents, restricted cash, and short-term investments.

Risk analysis

• FX risk: As being operational in over 20 countries and with the current appreciation of the dollar due to macroeconomic factors has made the FX risk one of the primary concerns for the company.
• Voting Concentration Risk: Daniel Ek and Martin Lorentzon, the company's founders, held 31.90 percent and 42.50 percent of the total voting power in the company, respectively, as of December 31, 2021, thus controlling all matters requiring shareholder approval and limiting the ability of other shareholders to influence corporate decisions.

Outlook

• Spotify estimates the total revenue of EUR 2.80 billion by April 27, 2022, assuming a 600-basis point Y/Y growth tailwind owing to changes in foreign currency rates.
• It also estimates an Operating Profit/Loss of EUR (197) million, including an Operating Loss of about EUR 50 million owing to negative foreign currency rate movements on Operating Expenses.
• The business forecasts gross margin to be about 25.2 percent, up 190 basis points owing to accruals for prior quarter publishing royalty estimations being released.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation

Source: 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 49.90% in the past six months and is currently at the lower end of its 52-week range of USD 89.03 to USD 305.60. The price is currently below both short-term (50-day) SMA and long-term (200-day) SMA, but RSI is good at 55.37 showing momentum in this recovery. We have valued the stock using the EV/Sales multiple-based relative valuation methodology and arrived at a target price of USD 143.22.

Considering the significant correction in the stock price, leader in the music streaming industry, growth in premium subscribers, robust top-line performance, encouraging outlook, associated risks, and current valuation. We recommend a "Hold" rating on the stock at the current price of USD 113.32, up 0.76% as of June 09, 2022, at 12:14 PM PDT.

One Year Technical Chart, as of June 09, 2022, at 12:14 PM PDT. Data Source: REFINITIV, Analysis by Kalkine Group

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

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting 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.