Spotify Technology SA (SPOT, Financial) experienced a daily gain of 1.16%, although it recorded a 3-month loss of -4.67%. The company also reported a Loss Per Share of 5.38. The question that arises is whether the stock is modestly undervalued. This article presents a detailed valuation analysis of Spotify Technology SA (SPOT) to answer this question.
Company Overview
Spotify Technology SA, based in Stockholm, Sweden, is one of the world's largest music streaming service providers, boasting 489 million total listeners. The company generates revenue through its premium service (paid subscription model) and ad-supported service, which accounted for 87% and 13% of Spotify's 2022 total revenue, respectively. The current stock price stands at $158.39, while the GF Value, an estimation of fair value, is $192.51. This discrepancy suggests that the stock may be modestly undervalued.
Understanding GF Value
The GF Value is a proprietary measure that represents the intrinsic value of a stock. It is computed based on historical multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line offers an overview of the fair value at which the stock should ideally trade. If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Spotify Technology SA (SPOT, Financial) is estimated to be modestly undervalued based on GuruFocus' valuation method. The company's market cap is $30.80 billion, and because it's relatively undervalued, the long-term return of its stock is likely to be higher than its business growth.
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Financial Strength
It is crucial to assess the financial strength of a company before investing in its stock. Companies with poor financial strength pose a higher risk of permanent loss. The cash-to-debt ratio and interest coverage offer valuable insights into the financial strength of a company. Spotify Technology SA has a cash-to-debt ratio of 2.02, which is worse than 66.02% of companies in the Interactive Media industry. The overall financial strength of Spotify Technology SA is rated 6 out of 10, indicating a fair financial condition.
Profitability and Growth
Investing in profitable companies carries less risk, especially those with consistent profitability over the long term. Spotify Technology SA has been profitable 0 years over the past 10 years. Its operating margin of -6.93% is worse than 62.09% of companies in the Interactive Media industry. Overall, GuruFocus ranks Spotify Technology SA's profitability as poor.
Growth is a crucial factor in a company's valuation. The faster a company is growing, the more likely it is to be creating value for shareholders. The 3-year average annual revenue growth rate of Spotify Technology SA is 15.2%, which ranks better than 63.57% of companies in the Interactive Media industry. However, the 3-year average EBITDA growth rate is -402.9%, which ranks worse than 99.48% of companies in the Interactive Media industry.
ROIC vs WACC
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) and the weighted cost of capital. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. A higher ROIC than WACC is preferable. For the past 12 months, Spotify Technology SA's ROIC is -25.7, and its WACC is 13.41.
Conclusion
Overall, Spotify Technology SA (SPOT, Financial) stock is estimated to be modestly undervalued. The company's financial condition is fair, but its profitability is poor. Its growth ranks worse than 99.48% of companies in the Interactive Media industry. To learn more about Spotify Technology SA stock, you can check out its 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
