- Spotify and its growth narrative don’t work in a risk-off environment
- In different times, growth would be attractive
- Continued losses keep the stock under control for now
Spotify (NYSE:SPOT) stock has made progress, but I can’t see any reason for it to rise from current levels. There are positives and negatives to be taken from the Luxembourg-based firm’s February Earnings report. But the overall thrust shouldn’t do anything to make investors believe that prices are going to move upward much.
That isn’t to say the positives weren’t substantial — we’ll get into those in a bit — but it is just that Spotify’s issues will continue to plague the firm. This should lead to share prices going sideways for at least the first quarter. Let’s begin with the good and then get into the bad, while noting that this time, the bad outweighs the good.
Positives for SPOT Stock
Spotify’s positives are largely related to growth. Investors who consider Spotify’s user growth and its relation to top-line growth could very well be attracted to the firm and buy its stock.
Broad metrics support that idea: Total Monthly Active Users increased 18% to 406 million by the end of fourth-quarter (Q4) ‘21. It is a nice metric. However, what is most impressive is the 24% increase of total revenue due to the 18% user growth. Spotify was able pick up a number of high-value customers from 2020 to 2021.
Spotify also made significant progress during the same period in increasing its ad-supported revenue. They increased by 40%. The company plans to increase ad-supported revenues so that premium subscriptions are less of a driving force in its bottom-line. That said, premium subscriptions also increased by a strong 22% in 2021, outpacing growth in the firm’s user base.
However, that is as good as it gets. Spotify continues to face the same problems.
SPOT Stock Negatives
Spotify isn’t the same company now that it was during the height of the Covid-19 pandemic. As people were kept inside, digital media consumption peaked. This simple truth helped Spotify to achieve high market valuations. Investors didn’t care then that Spotify was still producing losses. They do now.
The problem is that while Spotify is heading in the right direction in terms of losses, things aren’t improving fast enough.
The company’s 581 million euro net loss in 2020 was impressively reduced to a 34 million net loss by 2021. However, there is a lot more negative momentum associated with those net losses.
For one, Spotify’s losses in Q4 were particularly troublesome: The company posted a 39 million Euro net loss in the quarter. It posted a total loss of 34 million Euros in 2021. It was in the black for the first three quarters, but then it gave it back and more.
This must concern the market. However, I see the real problem is the anticipated losses going forward.
Spotify provided guidance for a net loss of 67 million Euros in the first quarter. 2022 hasn’t been kind to tech stocks. But even if it were to immediately change and tech stocks came back into fashion, it isn’t good. Losses are rising on a regular basis or they are expected to.
What to do
This is why SPOT stock should be flat through the first quarter. It is not attractive at the moment. From what I can see in its earnings report, it is not attractive. It continues to lose money, and has given guidance indicating that it will continue doing so.
The company will need more radio streaming revenue to increase its ad revenue. It will also need to generate a greater share of revenue than subscriptions. If it proves it can reach profitability, it is worth looking into. It is a growth stock without positive market sentiment.
Alex Sirois had no positions, directly or indirectly, in any of the securities mentioned in this article at the time of publication. This article is the author’s opinion, subject to InvestorPlace.com. Guidelines for Publishing.
Alex Sirois is an investorplace freelance contributor. His stock investing style focuses on long-term, invest-and-hold, wealth building stock picks.