Down heavily after reporting earnings, are Spotify shares now a buy?

Spotify shares are down heavily after disappointing in its recent earnings report. Gordon Best considers whether this could be a buying opportunity.

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Spotify (NYSE:SPOT) is a Swedish audio streaming and media services provider, giving access to millions of songs and other content from artists globally. The company has grown rapidly in recent years, and its stock price has followed suit in 2023, climbing by over 75%.

But with the recent earnings report disappointing investors, are Spotify shares now at a good price for my portfolio?

Why would I be interested?

There are a few reasons why investors may consider investing in Spotify shares:

  • Strong track record: The company has a strong track record of growth. In the last five years, Spotify’s revenue has grown at an average annual rate of 19%. This growth is being driven by the increasing popularity of streaming music, as well as Spotify’s expansion into new markets.
  • Market dominance: Spotify has a dominant market share in the streaming music market. The company has over 400m active users, and it accounts for over 30% of the global streaming music market. This gives Spotify a significant advantage over its competitors, such as Apple and Amazon.
  • Well positioned: Spotify is well-positioned to benefit from the growth of the global streaming music market, expected to reach $100bn by 2025.
  • Turning profitable: Spotify is currently not profitable, but this is expected to change in the next three years. This presents a potential opportunity to investors.

What might put me off Spotify shares?

  • Profitless: As noted, the company is still not profitable. In the most recent earnings report, Spotify posted a net loss of $0.9bn. This is due to the company’s high marketing and content costs.
  • Competition: Spotify faces increasing competition from other streaming music providers. Apple Music and Amazon Music are both investing heavily in their streaming music businesses, and they are both gaining market share.

How are the numbers?

Before investing in Spotify shares, I want to have a good understanding of these metrics:

  • Price-to-sales (P/S) ratio: The (P/S) is a measure of how much investors are willing to pay for revenue a company generates. Spotify’s P/S ratio is two, notably above the sector average of 1.3, indicating that investors would have to pay a premium for Spotify shares.
  • Earnings per share (EPS): EPS is a measure of how much profit a company generates per share. Due to being unprofitable, Spotify’s EPS has been negative in recent years. However, this is expected to turn positive in late 2023. The rate of EPS growth is 83%, suggesting that there could be some major growth ahead if the company can execute its strategy.
  • Discounted cash flow (DCF): The DCF is a measure of future earnings. The current share price of $140.38 is currently 4% below fair value of $146.70. This suggests there may be some growth potential, but not a significant opportunity.

Am I buying?

Spotify shares present an exciting opportunity for investors who are looking for exposure to the growth of the streaming music market. However, with interest rates as high as they are, and with more resilient companies competing for market share, I will not be investing in unprofitable companies such as Spotify.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Gordon Best has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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