Spotify Stock Down 9% Today – Time to Buy SPOT Stock?

Spotify stock is declining 9% in pre-market stock trading action despite reporting a strong fourth-quarter loss as negative momentum for former pandemic winners continues.

For the three months ended on 31 December, the audio streaming platform reported total revenues of €2.69 billion resulting in a 24% increase compared to the same period a year ago. The figure was also slightly higher than Wall Street’s consensus estimate of €2.65 billion for the period.

Total monthly active users grew 18% at 406 million with ad-supported (free) MAUs increasing 19% at 236 million and premium subscribers increasing 16% at 180 million.

Meanwhile, gross margins stood relatively unchanged compared to previous periods at 26.5% while operating margins came in at minus 0.3% compared to minus 3.2% reported by the platform in Q4 2020 and 3% in the previous quarter.

By the end of this quarter, Spotify’s net losses landed at €39 million compared to €125 million the firm lost a year ago while diluted losses per share stood at €0.21 compared to €0.66 the firm reported in Q4 2020. Analysts’ consensus estimate was minus €0.36 for the period.

For the next quarter, the company is predicting that total MAUs will grow to 418 million resulting in a 3% quarter-on-quarter jump with premium subscribers being expected to grow to 183 million. Total revenues are being forecasted at €2.6 billion – a quarter-on-quarter decline. This forecast was in line with the market’s estimates for the firm.

It appears that market participants were disappointed by the firm’s guidance as revenues seem to be peaking following the strong tailwind the business experienced during the pandemic. This could result in slower or negative growth rates down the road as Spotify may start to struggle to beat pandemic-era comparables.

What could be expected from this tech stock after this quarterly report? In this article, I’ll be assessing the price action and fundamentals of Spotify stock to outline plausible scenarios for the future.

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Spotify Stock – Technical Analysis

A break below the $200 level has been one of the most worrying bearish technical signals triggered by the latest price action in Spotify stock. Even though bulls attempted to push the price above this threshold in the past couple of days they failed at it yesterday during a session that featured above-average trading volumes.

In this regard, volumes exceeded the 10-day average just yesterday but the price still closed 6% lower ahead of the release of this report at $191.92 per share.

This emphasizes the importance of this support area – now turned to resistance – and makes today’s pre-market downtick a dangerous one as it can lead to an acceleration in the downtrend that SPOT stock has been embarked on lately.

As the chart shows, there is a descending price channel formation in play with the next area of support being found at $145 resulting in a total 24% downside risk based on yesterday’s closing price.

Momentum indicators keep favoring a bearish outlook as well as the Relative Strength Index (RSI) has failed to climb above the 50 level while standing at 41. Meanwhile, the MACD is also standing in negative territory.

Spotify Stock – Fundamental Analysis

Today’s earnings report was a good one from multiple standpoints but the market’s sentiment toward growth stocks continues to be depressed by expectations of a shift in macro conditions.

In the past three years, Spotify’s revenues have grown at an average of 24% per year. Based on the management’s next quarter’s projections, that growth would decelerate to around 18% and that may have spooked market participants.

Moreover, sequential growth is being expected to turn negative while user base growth seems to be slowing down as well.

Nevertheless, operating margins continue to improve and the firm remains cash-flow positive – which is a good thing. In this regard, during the entire 2021 fiscal year, Spotify produced $277 million in positive free cash flows. This reduces dilution risks and makes the firm more financially stable from a fundamental perspective.

Convertible notes (long-term debt) ended the quarter at $1.2 billion while lease liabilities are standing at $579 million. The firm reported total assets of $7.1 billion including $2.7 billion in cash and equivalents.

If today’s pre-market decline materializes during the live session, Spotify’s valuation will drop to around $32 billion. Based on the market’s forecasted revenues for this year, this results in a forward P/S ratio of 2.4x for the firm.

Spotify is a company with a strong and highly disruptive business model, robust finances, and a loyal user base. This temporary headwind caused by the market’s overly pessimistic sentiment toward growth stocks could be allowing long-term investors to buy a great company at a heavily depressed valuation.

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