“Armchair Trader Series” Recommendations
- Week Beginning -
Monday,  February 22, 2021

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy

ALSO

"Trading Capital Management"



Options Trade - Spotify Technology SA (NYSE: SPOT) Calls

Wednesday, February 24, 2021

** OPTION TRADE: Buy SPOT APR 16 2021 360.000 CALLS at approximately $18.00. (Max. $20.00)

 Place a pre-determined sell at $36.00.

Also include a protective stop loss of $7.20.

Music streaming and podcast powerhouse Spotify Technology SA (NYSE: SPOT) outperformed in 2020, with pandemic-led tailwinds being reflected in the stock’s price appreciation over the past year (148% gain in the past twelve months).

However, like other COVID-19 "stay-at-home" plays, some may fear this growth story is starting to cool. As a result, Spotify shares have held steady between around $310 and $360 since December.

While this isn’t a cheap stock by any means, SPOT looks attractive at today’s prices. Profitability remains many years off as the company continues to scale up, but if it maintains double-digit growth, it could exceed Wall Street’s muted expectations in 2021.

About Spotify Technology…..

Spotify has been called the Netflix of music, and clearly the company has plans to expand its audio content reach far beyond that.

Operating in nearly 80 countries, Spotify said its total number of users, including of its ad-supported service, grew to 207 million in 2018, up from 191 million at the end of September.

The service, which launched in Sweden in 2008, has reached 96 million paying subscribers. That compares with around 50 million paying subscribers for its closest rival Apple Inc's Apple Music, which launched in 2015.

It forecast 117-127 million premium subscribers by the end of 2019, compared with analysts' average forecast of 121 million.

SPOT’s 96 million paying subscribers nearly double Apple Music’s roughly 50 million.

Demand for streaming music platform Spotify soared in the early days of the Covid-19 pandemic, as people worldwide were scrambling for new forms of entertainment. In April 2020, the company said in its earnings report that premium subscribers for the first quarter rose 31 per cent year-over-year to 130 million. The case for bullish Spotify stock projections was easy to justify at the time and the investment thesis merely grew from there.

Earnings…..

Spotify released results for Q4 2020 (ending Dec. 31) on Feb. 3. Revenues came in at €2.168 billion ($2.61 billion), slightly above analysts’ estimates, while loss per share for the quarter (79 cents) was 17 cents higher than expected.

Premium Revenues (subscriptions) continued to grow at a double-digit pace, but, as has been the case in recent quarters, most of Spotify’s growth came from its Ad-Supported segment (29% year-over-year growth).

Yet, it wasn’t sales nor earnings that investors reacted to the most, but rather, to forward-looking guidance.

Spotify guided for sales of €9.01-€9.41 billion ($10.9 billion-$11.4 billion) in 2021, and with projections falling short of expectations, shares sold off following the earnings release.

Since then, shares have bounced back to pre-earnings levels.

Moving Forward.....

Spotify’s current market capitalization ($69.4 billion) is based on the assumption that it will continue to disrupt the legacy audio media industries (radio). In other words, become for music/podcast streaming what Netflix (NFLX) is for video streaming.

With annual revenue hitting the $10 billion mark, it’s going to be harder for Spotify to sustain prior rates of growth, but the company has several ways of moving the needle in the coming year and beyond.

These include its expansion into new markets like South Korea as well as its continued aggressive push into podcasting. What’s more, the company is planning to increase subscription prices.

All together, this may be enough for results to exceed today’s muted expectations. That’s not to say that shares will surge to the extent we saw in 2020, but stronger-than-expected growth could help keep Spotify shares on an upward trajectory.

Influencing Factors…..

Management said its strong growth came from a combination of music as well as its growing podcast business. Investors and analysts were eager to assign bullish Spotify stock predictions in May when it announced Joe Rogan’s podcast will become exclusive to Spotify.

Spotify noted that the inclusion of Rogan “stimulated new user additions, activated first time podcast listeners, and driven favourable engagement trends, including vodcast consumption.”

The company is hoping to leverage its success with Rogan and give investors more reason to justify a bullish SPOT stock forecast. Most notably, the company is home to 2.2 million unique podcasts and chances are likely one or more could become major hits and attract a new base of paying customers.

It appears Spotify is taking a page out of Netflix’s book by owning and producing its own content that can’t be found anywhere else. The best part of this strategy is the lofty valuation multiples afforded to content owners that leverage their own platform to deliver directly to the consumer.

Analysts Thoughts.....

Atlantic downgraded Spotify to neutral, but it also set a price target of $370 on Spotify stock that currently costs just $336 and change – which is hardly bearish news. 

Contradicting Atlantic's downgrade, analysts at Rosenblatt Securities reiterated their buy rating on Spotify today and set a $425 price target, saying "it's hard not to see Spotify's global dominance continue." 

Also, Morgan Stanley reiterated a buy-equivalent rating on Spotify -- admittedly with only a $350 price target that's below Atlantic's, but still above where Spotify trades today. 

And, all three analysts agree that the stock looks underpriced today.

Summary.....

Spotify itself revealed in guidance at "Stream On" yesterday that it is looking to grow sales more than 20% this year (a number that is ahead of analyst estimates), improve gross profit margins by 500 basis points, and potentially exceed 10% operating profit margins. Long term, says the company, it is targeting a global audience of 1 billion monthly average users of its services.