What Is Going on With SPOT Shares?

One of Wall Street's biggest winners of the day is Spotify Technology, a broadcasting company whose shares have climbed 9.7% to a price of $169.68 -- near its average analyst target price of $172.24.

The average analyst rating for the stock is buy. SPOT outperformed the S&P 500 index by 9.0% during today's afternoon session, and by 64.0% over the last year with a return of 75.0%.

Spotify Technology S.A., together with its subsidiaries, provides audio streaming services worldwide. The company is a consumer cyclical company, whose sales and revenues correlate with periods of economic expansion and contraction. The reason behind this is that when the economy is growing, the average consumer has more money to spend on the discretionary (non necessary) products that cyclical consumer companies tend to offer. Consumer cyclical stocks may offer more growth potential than non-cyclical or defensive stocks, but at the expense of higher volatility.

Spotify Technology does not release its trailing 12 month P/E ratio since its earnings per share of $-5.3 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for SPOT of -32.0. Based on the company's positive earnings guidance of $0.51, the stock has a forward P/E ratio of 332.7.

The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the consumer discretionary sector has an average P/E ratio of 22.33, and the average for the S&P 500 is 15.97.

The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.

When we divide Spotify Technology's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of 0.25. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing SPOT's growth potential .

To better understand the strength of Spotify Technology's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:

Date Reported Total Revenue ($ k) Operating Expenses ($ k) Operating Margins (%) YoY Growth (%)
2023-02-02 11,727,000 -3,585,000 -6 -700.0
2022-02-03 9,668,000 -2,497,000 1 125.0
2021-02-05 7,880,000 -2,308,000 -4 -300.0
2020-02-12 6,764,000 -1,795,000 -1 0.0
2019-02-12 5,259,000 -1,396,000 -1
  • Average operating margins: -2.2 %
  • Average operating margins growth rate: -41.2 %
  • Coefficient of variability (lower numbers indicate less volatility): 126.1 %

Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Spotify Technology's last four annual reports, we are able to obtain the following rundown of its free cash flow:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cash Flow ($ k) YoY Growth (%)
2023-02-02 46,000 -25,000 71,000 -84.08
2022-02-03 361,000 -85,000 446,000 32.34
2021-02-05 259,000 -78,000 337,000 -52.4
2020-02-12 573,000 -135,000 708,000 50.96
2019-02-12 344,000 -125,000 469,000
  • Average free cash flow: $406.2 Million
  • Average free cash flown growth rate: 0.0 %
  • Coefficient of variability (the lower the better): 2173470135.0 %

Free cash flow represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, SPOT is in a position to do either -- which can encourage more investors to place their capital in the company.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.

Spotify Technology's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 16, so the company's assets may be overvalued compared to the average P/B ratio of the Consumer Discretionary sector, which stands at 3.12 as of the first quarter of 2023.

Spotify Technology is by most measures overvalued because it has a negative P/E ratio, an elevated P/B ratio, and irregular cash flows with a flat trend. The stock has poor growth indicators because it has a a negative PEG ratio and consistently negative margins with a negative growth trend. We hope you enjoyed this overview of SPOT's fundamentals.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.