Spotify Analysis

Hi Friends,

Spotify (ticker: SPOT) just reported its Q4 2018 operating results and posted their first ever operating profit. However, their forward guidance for 2019 was more tempered than expected, so the stock is actually down despite this historic news.

I am a fan of the Spotify product. It is amazing to be able to listen to music for free (or still cheap with their Spotify premium) and for it to be basically any music in the world that you want. It opens you up to learning about new artists and allows you the chance to listen to your old favorites with out digging out cassette tapes, CDs or old iPods – truly a fantastic product. I also have been really enjoying their Podcast options, as you can learn or be entertained with many fantastic educational materials or stories. One Podcast I have enjoyed recently is titled “Swindled” and tells stories of greed and theft that I find very interesting and entertaining.

Regardless of how much I like the product, I am not a fan of the stock. It is much too expensive compared to its operating results. The company has a current market cap of $24 billion, yet only makes gross revenues of $5 billion (although they are growing still), so it is trading at 5x sales, while the average of the S&P 500 is 1.5x sales. Also, the do not make money in their current model, so analyzing the PE Ratio is impossible and adds to the risk of the investment. The company’s book value is about $1.5 billion, so there is no real assets behind the valuation. I do believe good news and continued growth can push the stock higher, however, the downside risk is too great in this one to be a feasible investment opportunity, in my opinion.

Love the product, but will pass on owning a piece of the company.

Would love to hear any thoughts and perspectives others have!

Good luck,

Brian