Spotify’s Story Is On Track, And Its Price Is Getting Better

 | Aug 27, 2022 07:00AM ET

  • 2022's volatile market continues to offer opportunities
  • Spotify's growth story is still on track
  • The investment story is out of fashion, which makes it more interesting

    • In my last article, I talked about bear market shopping. As often happens when writing about the market, I looked a little silly. The title emphasizing a bear market bottom came in the week the market bottomed, at least so far for this year. As the saying goes, by the time it’s in the news, it’s in the price.

    Still, I said there were more interesting buying opportunities than I had seen in a while. I think that holds up, even with the S&P 500 up 5+% since then (using Friday mid-day prices) and other indices up more.

    I’m still of the view that the U.S. economy is not going off a cliff, even as Europe and other markets are more challenged. I don’t have a much more sophisticated macro view than that—will we hit a recession technically or more deeply, will the Fed pivot or keep tightening, will inflation slow down? I can’t say. However, I think it’s still an opportune time to buy.

    I organize the buying opportunities into four buckets:

    1. High-quality companies that have sold off and are now at a fair price. Say, Google (NASDAQ:GOOG) (NASDAQ:GOOGL) at 21-22x free cash flow.
    2. Companies caught in an industry with a severe but likely temporary downturn, i.e., COVID-hangover companies that have seen their stocks dive this year. Google and advertisers could fall into this bucket, but a company like Zoom Video Communications Inc (NASDAQ:ZM) is a better example.
    3. Companies that are over-earning and that the market is pricing in a meaningful pullback–but where the pullback may be overestimated. Most of the names I mentioned in the last article—housing-related stocks and specifically Williams-Sonoma Inc (NYSE:WSM) typify this category.
    4. Special situations: market stress tends to widen merger arbitrage spreads and create more opportunities for people who can dive in on this sort of work.

    There’s some overlap, of course, and you may like other types of companies, but those are my stand-out groups.

    I’m going to write about an example stock from each group over the next few weeks. I own stocks in each category, though for these articles, I’m going to analyze companies I haven’t bought into yet, to see whether there’s still an opportunity.

    Let’s start with a company between bucket one (high quality) and bucket two (localized recession).

    h2 Spotify: The Audio Leader, But Not Yet A Profit Factory/h2
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    Spotify Technology (NYSE:SPOT) feels like—and sounds like—a high-quality company. It is the market leader for . Spotify has a founder-CEO (Daniel Ek), positive free cash flow on a last twelve months basis since mid-2019, and has only raised capital since coming public (including its IPO, which was a direct listing) by selling convertible notes with 0% interest at the peak of the meme stock bubble in February 2021—which is just smart corporate finance.

    The company’s stated aim at their recent investor day is to become people’s homes for audio and listening. It wouldn’t be surprising to see the company gain leadership in audiobooks now that they bought Findaway. The presentation left space for unknown future categories that Spotify might add to its ‘audio platform.’