Spotify’s Saga Shouldn’t Slice into Earnings

By now, many investors have caught on to the latest saga surrounding COVID-19, causing attention to turn to Spotify Technology S.A. (SPOT). Throughout 2020, the music streaming giant made heavy investments into podcasting, with the largest of its deals, worth around $100 million, going to the Joe Rogan Experience podcast. Lately, legendary artists have demanded that their music be pulled from the platform, over their perception of misinformation that Joe Rogan spread about the pandemic.  

Spotify is expected to release its quarterly upcoming earnings after hours on February 2, and its fundamental business is not anticipated to show an immediate impact from protests by the likes of Neil Diamond and Joni Mitchell. 

Filling in his hypothesis on these fundamentals is Mark Mahaney of Evercore ISI, who believes that Spotify is “on the verge of a Gross Margin inflection point, driven by growing contribution from its 2-sided Marketplace offerings and scale against its Podcast investments.” Calling it a “major stock catalyst,” he is confident that SPOT’s podcast initiative should start paying off in the near-term.  

Spotify’s two-sided marketplace denotes its capacity to reap revenues from both its established subscription-based business, and its licensing of tools to creators. Said tools facilitate increased engagement with the creators’ fan bases.  

Mahaney rated the stock a Buy, and provided a price target of $365. This target currently represents a possible 12-month upside of 111.01%. Just as is with many names across tech and growth stocks, SPOT is down from its November highs by more than 42%.  

Beyond its margins, Mahaney was encouraged that Spotify had launched in six new countries during the current quarter, and has plans for further expansion going forward. He expects the increased monthly active user numbers to serve as a tailwind for the company’s growth.  

Writing about the upcoming earnings call, the five-starred analyst mentioned he will be paying close attention to Spotify’s “comments on Podcasts penetration, content investment and any progress report on the timing of Podcasting contribution to Gross Margin.”  

He is also awaiting clarity regarding Spotify’s plans for HiFi steaming tiers, something that its competitors have already begun launching. HiFi is considered to be lossless audio at CD-quality, provided through streaming.

On TipRanks, SPOT has an analyst rating consensus of Strong Buy, based on six Buy ratings and one Hold rating. The average Spotify price target is $278.33, suggesting a potential 12-month upside of 60.90%. SPOT closed trading Friday at a price of $172.98 per share.  

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