Why Spotify’s share price is soaring ahead of earnings

Despite a slow start, Spotify’s [SPOT] share price has soared to new heights this year. The stock climbed 100.3% to a 52-week high of $299.67 on 22 July. Although Spotify’s share price has since taken a tumble, it is showing signs of a recovery in the run-up to its third-quarter earnings release on 29 October. As of 27 October, Spotify’s share price is up 89.59% for the year at $287.45.

That’s not to say 2020 has been an easy year for Spotify’s share price, though.

After hitting a new all-time high at the end of July, Spotify’s share price fell in August. Although it reached an intraday high of $294.67 on 2 September, Spotify’s share price spent most of the month in a downward spiral, falling to an intraday low of $225.18 on 24 September before closing at $231.26.

Rising revenue on widening losses

When Spotify released its second-quarter earnings on 29 July, it reported a net loss of €356m, or €1.91 per share, compared with €76m or €0.42 per share in the year-ago period. The result missed consensus estimates of €0.45 per share, according to CNBC.  

Despite the widening losses, Spotify posted a year-over-year revenue rise of 13% to €1.89bn for the three months ended 30 June. This missed analysts’ estimates of €1.93bn.

Over the last four quarters, Spotify has beaten both consensus earnings and revenue estimates twice, according to Zacks Equity Research. As a result, Daniel Ek, founder and CEO, remains upbeat about Spotify’s share price prospects in the wake of the second-quarter earnings miss.

“After making adjustments to help us weather the pandemic in Q1, consumption returned to normal levels this quarter. Monthly active users increased to 299 million and subscribers grew to 138 million, both exceeding our expectations. Advertising revenue, which took a significant hit in Q1, improved notably throughout the quarter, and we feel good about our momentum as we enter Q3,” Ek said in a statement released alongside the earnings.

“Advertising revenue, which took a significant hit in Q1, improved notably throughout the quarter, and we feel good about our momentum as we enter Q3” - Daniel Ek, founder and CEO

Looking ahead to the next earnings call, Spotify forecasts revenue to be between €1.85bn and €2.05bn for the third quarter. Meanwhile, analysts are expecting €2.01bn, according to CNBC.

The company also expects total premium subscribers to grow to between 140 and 144 million in the third quarter, which is above market expectations of 141.4 million, according to Refinitiv.

Plans for profitability

Spotify has solidified its podcast presence in recent months, signing content deals with popular names such as Joe Rogan and Chernin Entertainment studio, but question marks remain over its near-term profit potential.

“Like Shopify, Spotify is a hungry growth stock with no plans to deliver dependable profits anytime soon. It's all about top-line growth and broadening the company's product portfolio,” Anders Bylund wrote in The Motley Fool.

“Like Shopify, Spotify is a hungry growth stock with no plans to deliver dependable profits anytime soon. It's all about top-line growth and broadening the company's product portfolio” - Anders Bylund

However, he was not perturbed, considering that profits will come eventually, and that many investors underestimate the long-term value potential of Spotify’s share price. “That's why Spotify is a solid buy today, despite a lofty price tag,” Bylund added.

Deepak Mathivanan, a Barclays analyst, kept an Overweight rating on Spotify’s share price on 14 October, but raised the firm's price target from $310 to $320, reports The Fly. The revised price target presents a potential 12.3% upside from its 22 October close.

The consensus among 31 analysts polled by CNN Money is to Buy the stock, the position held by 14, while one analyst rated the stock an Outperform and 10 a Hold. On the other hand, two analysts rate the stock as Underperform and four rate it a Sell.

Among 25 analysts offering 12-month forecasts for Spotify’s share price, CNN Money reports a median target of $250.65, with a high estimate of $302.73 and a low of $120.73. The median estimate would represent a 14.7% drop from Spotify’s share price at close on 27 October.