Sometimes a shortfall isn’t enough to sink a business. Spotify online music provider (PLACE) discovered this after posting missing on EPS but offering a few choice numbers in the mix that changed everything. The stock is currently up 14% on the day.
Spotify’s revenue report was somewhat mixed. The company posted a loss of $0.86 per share, which compares poorly to Street’s projections calling for a loss of $0.72 per share.
However, SPOT saw a gain in revenue, to $2.91 billion from $2.85 billion. It also recorded a gain in monthly active users, with 433 million connections against the expected 428 million.
The past 12 months for Spotify shares are still down, though stabilizing from where I last discussed the company in April. Since April 25, the company has maintained a tight range between $90 and $110 per share. Today’s gains knocked it off that track slightly, bringing it to around $119 per share.
I was bearish on Spotify before, as there wasn’t much to distinguish it from the pitch. After seeing some of the latest developments over the past four months or so, there’s still not much to like here.
However, the company is progressing. If Spotify can continue to make changes, especially if it can sustain that revenue, then maybe there’s something to be done. Thus, I change my position to neutral.
Wall Street’s view on SPOT stocks
When it comes to Wall Street, Spotify has a Moderate Buy consensus rating. This is based on 11 purchases and 10 bookings attributed over the past three months. The average Spotify price target of $143.05 implies an upside potential of 20.2%.
Analyst price targets range from a low of $103 per share to a high of $230 per share.
Investor sentiment is down
Currently, Spotify has a smart score of 5 out of 10 on TipRanks. This puts Spotify in a state of perfect neutrality, right in the middle of the ranking. Despite this, investor sentiment is down in several separate measures.
Hedge fund involvement, based on TipRanks 13-F Tracker results, is one such declining metric. Hedge funds have sold 1.5 million Spotify shares since last quarter.
Additionally, this is the fourth consecutive quarter that hedge funds have sold SPOT shares. There doesn’t seem to be a buy-the-dip plan in place here. Hedge funds are simply running for the exits faster than before.
Insider trading at Spotify, meanwhile, is little more than a blank slate. No data is currently available on insider trading at Spotify in any direction.
Meanwhile, retail investors are following the lead of hedge funds. The number of TipRanks portfolios that held Spotify shares fell 0.3% over the past seven days. This is on top of a 0.6% decline over the past 30 days.
Finally, consider Spotify’s dividend history, or rather Spotify’s lack of dividend history. As a growth stock, Spotify generally focuses more on building its stock price. This strategy worked well a year ago, but hasn’t gone so well in recent months.
Weird movements on Spotify make a confusing picture
Things at Spotify seem downright confusing these days. His subscriber count is on the rise, which is fantastic. The investor sentiment numbers, meanwhile, are about as tough as the number of subscribers. It’s a weird picture, but the further down you go, the weirder it looks.
First, Spotify has quietly halted production of its Car Thing in-dash device. The Car Thing was designed to make it easier to control Spotify while driving, making it a fairly natural selection to replace car stereo and streaming options like Sirius XM (SIRI).
Great, so why did it stop? Spotify representatives noted that several factors killed Car Thing, including “product demand and supply chain issues”. While the currently released Car Things will continue to do its job, finding replacements will be a much more difficult proposition.
Spotify reps noted that the device “unlocks some useful learnings” and that Spotify isn’t giving up on the idea that it’s a worthy car stereo replacement. With an increasing number of factory car stereos offering an easy connection to Spotify, the notion of a separate Car Thing may not have been so helpful.
Worse still, Spotify’s push into podcasting has taken a hit. In April, we heard about Spotify’s push to add DC content, now two big hits for Spotify are out of the picture.
The “Reply All” podcast aired its last episode in June, as its hosts left production company Gimlet. Meanwhile, the Obamas turned down an extended deal with Spotify to go with Audible instead.
Spotify’s subscriber count is on the rise, and that’s certainly good news. Premium subscribers increased by 14% compared to the same period last year, reaching 188 million, and total revenues increased by approximately 23%.
Spotify expects this growth to continue, reaching 194 million premium subscribers by the end of the quarter and generating around $3 billion in revenue by the end of the quarter.
This may prove to be a little too pious for a market like the one we see. Certainly cheap entertainment is unlikely to be ignored by people who pay more at the gas pump and at the grocery store counter.
However, the idea that it will be their cheap entertainment of choice may be a bridge too far. Sources of cheap entertainment abound, after all. Dozens of streaming services are currently in play, and most of them are priced at Spotify’s $9.99 per month or below.
Although Spotify has an edge in that it is one of the best sources of audio entertainment, it may find itself playing second fiddle to visual services.
Radio broadcasting is always free, after all. Plus, with most cars having auxiliary sockets and USB ports, plugging in a USB stick full of select songs or even podcasts is a more available option than ever.
Conclusion: looking up, but maybe too far
Give Spotify some credit here: despite skyrocketing inflation, its subscription prices have risen to match. This suggests some resilience on Spotify’s part. However, if the macroeconomic environment deteriorates further, Spotify subscribers may have no choice but to abandon the platform.
This level of uncertainty leaves me neutral on Spotify. He’s made great strides, but most of his recent news has been setbacks. The decline in investor sentiment also makes me wary of Spotify. With the company also trading above its lowest price targets, it has room to fall.
Spotify’s earnings have been impressive. It’s what Spotify could do for an encore that concerns me here. There is additional upside potential, but there is almost as much additional downside potential.