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Spotify Stock: 3 Reasons to Buy It In 2022

After SPOT’s poor performance in 2021, here are some reasons to be optimistic about Spotify in 2022.

Shares of Spotify  (SPOT) - Get Spotify Technology SA Report took a beating in 2021. After a solid performance in 2020, this prolonged tumble surprised many investors who entered positions during the stock’s bull run. Currently, SPOT is trading 35% below its 2021 peak.

But some analysts and investors see this trough as an opportunity. Here, we'll discuss whether this is a good time to buy Spotify and what the company's growth prospects are.

Figure 1: Spotify's logo icon.

Figure 1: Spotify's logo icon.

(Read more from the MavenFlix: Netflix Stock: This Analyst Predicts 20% Returns)

The audio streaming market

Music streaming grew around 15% YOY in 2020, and the market should continue to grow by at least 7% annually over the next five years (see below). Much of this growth will be thanks to expansions into underpenetrated emerging markets, where improving tech infrastructure has enabled the gradual adoption of streaming services.

Figure 2: Streaming music revenue and growth.

Figure 2: Streaming music revenue and growth.

Despite robust growth expectations, the audio streaming market is still very concentrated, at least when compared to video streaming. Spotify is clearly the dominant player. Its market share is about as large as those of its second- and third-largest peers combined.

Figure 3: Spotify's largest peers.

Figure 3: Spotify's largest peers.

Positive EPS expectations for 2022

According to analysts, Spotify should start to produce steady profits in 2022. In the first quarter of the year, the company is projected to deliver an EPS of $0.20. From there, the consensus points to rapid profit growth; EPS is expected to be about $0.60 in Q3, representing a 3x jump from Q1.

Figure 4: Spotify's EPS surprise and estimates by quarter.

Figure 4: Spotify's EPS surprise and estimates by quarter.

Assuming Spotify meets expectations - generating a profit and delivering greater value to its investors - it’s certainly reasonable to think its shares could appreciate in value next year

SPOT is in a dip

After a major devaluation in 2021, Spotify is trading at prices even lower than it was during the nadir of the pandemic-spurred market crash of 2020. That could indicate a “buy the dip” moment for SPOT.

SPOT has dropped nearly 25% YTD, and it’s a full 35% off its February 2021 peak price of $365 per share. Today, the stock trades at just $235 per share.

Figure 5: SPOT performance from January-21 untill December-21.

Figure 5: SPOT performance from January-21 untill December-21.

Our view: is SPOT a buy?

Spotify has plenty of positive factors going for it with regards to valuation. The most important of these are the excellent growth outlook for the audio streaming market in the coming years, the company's dominance within the market, and expectations that the company will start generating consistent profits within the next year.

Couple all this with the fact that the stock is trading at prices much lower than those seen in early 2021, and you can see why some long-term investors are thinking SPOT shares are presenting an attractive buy-in point right now.

(Read more from the MavenFlix: Netflix Stock: Should You Buy NFLX Shares in 2022?)

(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)