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Buy Spotify Stock At Pre-Q3 Earnings Levels?

Spotify stock lost plenty of steam in November, following a post-Q3 earnings spike. Some may see the move as bearish, while others could find it an opportunity to buy SPOT cheaper.

In late October, Spotify announced third quarter results. The numbers excited investors and sent Spotify stock  (SPOT) - Get Free Report up nearly 15% quickly. The key metric supporting bullishness was the large increase in the platform's MAUs (monthly active users) over the previous year, followed by an almost 30% YoY growth in revenue.

However, almost a month after the earnings announcement, shares have dipped 10% and returned to the same levels of early October. Today, MavenFlix tries to make sense of what is happening with SPOT, and debates whether the recent drop can be considered a buying opportunity.

Figure 1: Spotify app icon.

Figure 1: Spotify app icon.

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Recent downfall and a future opportunity

SPOT hit $205 per share in August and, since then, embarked on a strong bullish ride to six-month highs. However, in November, not long after the announcement of the company's third quarter results, Spotify stock dropped from a high of $300 to less than $250.

One of the possible causes for such decline is profit taking. If so, an opportunity to buy the dip could exist for those who like the fundamentals of the company, but that believed SPOT may have been too expensive or overvalued. Today, Spotify is trading at the lowest price in the last 3 months.

(Read more from MavenFlix: Netflix Stock: A New Metric For Investors To Track)

Podcast growth and ad revenue

Unlike what many might think, Spotify is not merely a music platform, but an audio one. Therefore, one should not only consider growth in the music streaming space when calculating the fair value of the stock.

As we discussed in “Spotify Earnings: Why The Stock Spiked On Q3 Results”, one of the most relevant growth drivers for Spotify today is podcast. This sub-segment of streaming audio is expanding fast and could become a substantial part of the company's P&L in the foreseeable future.

With ad-supported accounts growing at the same rate as paid users, monetizing on podcasts is a key next step for Spotify. We think that this could be a catalyst pushing Spotify stock higher in the future – even if not in the next few weeks or months.

Spotify dominates audio streaming

Spotify has one of the largest music libraries. However, we do not think that this sets the company apart from its competitors. Apple and Amazon, for example, continue to invest their bottomless piles of cash to boost their platforms’ content offerings as well.

What makes Spotify stand out, in our view, is its footprint in audio streaming. Despite the growth prospects, the market is still concentrated in the hands of few players, unlike what happens in video streaming. Spotify has clear market dominance, as the chart below depicts.

The investments in podcasts should only help Spotify to establish itself at the top for years to come. Currently, there are about 2.6 million podcast titles available on the platform.

Figure 2: Music streaming market share.

Figure 2: Music streaming market share.

Our view

After Spotify stock dropped more than 10% since the beginning of November, a window of opportunity may have opened for those who appreciate Spotify's business model. Buying SPOT today, however, may only prove to be a good long-term strategy, since volatility in the short term in unlikely to subside.

Is the price right?

Looking at a company’s business fundamentals is only half the work needed to find a good stock. How much one pays to own the shares is a key factor in the success of any investment. This is why valuation analysis is so important.

Alpha Spread’s user-friendly platform allows you to estimate a stock’s fair value –through valuation multiples, discounted cash flow, and more. I believe that the service is a must for anyone looking to own the right stock at the right price. Check out alphaspread.com and get started with a 7-day free trial.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting MavenFlix)