Insights

Why Spotify Stock Popped 20.5% In July

What happened

Shares of Spotify (NYSE: SPOT) popped 20.5% last month, according to data from S&P Global Market Intelligence. The global leader in music streaming and podcasts released a strong second-quarter earnings report, sending the stock soaring in July. A rise of 9.1% for the S&P 500 in July also helped propel shares higher.

So what

On July 27, Spotify released its earnings results for the three months ending in June. Revenue was 2.86 billion euros, ahead of the 2.81 billion-euro estimate from analysts, while earnings per share (EPS) hit a loss of 85 cents (in euros) versus a 63-cent loss estimate. Even with these mixed results, investors still decided to bid up Spotify stock following the report and are not worried about the company losing money at the moment. As long as revenue keeps growing at 20%+ a year (as it did last quarter), investors will likely be OK with Spotify’s negative profits.

So what drove this revenue beat? First, it came down to great growth from both premium subscribers and total monthly active users (MAUs) in the period. Spotify had 433 million MAUs in Q2, 5 million ahead of its previous guidance, and 188 million premium subscribers, 1 million ahead of its previous guidance. The company is also seeing strong growth from its ad-supported segments (both music and podcasts), with revenue growing 31% year over year in the first quarter.

With the fast growth of podcasts around the world, along with Spotify’s own investments in advertising technology and content studios, Spotify’s ad-supported revenue looks set to grow at a high rate for many years to come.

Investors shouldn’t forget how broad market gains can affect an individual stock’s price. In July, the S&P 500 was up 9.1%, while the Nasdaq 100 Index was up 13.5%. This undoubtedly had an effect on Spotify’s stock price last month. 

Now what

Even after this month’s gains, Spotify stock is down 50% this year and trades at a market cap of $22 billion. The company generated $11.2 billion in revenue over the past 12 months. Over the long term, management thinks it can achieve a 10%+ operating margin. At its current revenue base, this would equate to $1.12 billion in operating income, or a price-to-operating income (P/OI) of 19.6.

Given how fast the company is growing and the potential for music streaming and podcasts to continue growing around the globe, Spotify’s current market cap seems much too cheap, even with the recent price pop. 

Brett Schafer has positions in Spotify Technology. The Motley Fool has positions in and recommends Spotify Technology. The Motley Fool has a disclosure policy.

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