Spotify Could Offer Profitable Pullback Play

Spotify Technology S.A. (SPOT) sold off in October after missing Q3 2020 top and bottom line estimates, booking a loss of €0.58 per share on 14.1% year-over-year revenue growth to €1.98 billion. Buyers returned in November in reaction to a host of initiatives that included the acquisition of a podcast advertising platform, 2021 South Korean launch, and Spotify 2020 Wrapped, providing a year-end review of the user’s ‘listening moments’.

Impressive User Growth

Investors also shook off the bad quarter due to impressive growth metrics, with monthly average users (MAUs) rising 29% year-over-year to 320 million, above the top end of previous guidance.  North America and Europe provided the majority of users but the company also reported 30% growth in Latin America and 50% growth in the ‘Rest of the Word’, opening channels that will support higher advertising revenue in coming quarters.

Monness Crespi and Hardt Analyst Brian White raised his Spotify target from $310 to $380 on Wednesday, noting “After battling lackluster investor sentiment in 2018 and 2019, the Spotify story came to life in 2020 as its podcast push gained momentum and the value of the platform became better appreciated, resulting in a reinvigorated stock. We believe Spotify has further upside and are raising our 12-month price target.”

Wall Street and Technical Outlook

Wall Street consensus is mixed due to quarterly losses, with a ‘Moderate Buy’ rating based upon 9 ‘Buy’ and 5 ‘Hold’ recommendations. More importantly, three analysts believe Scottify is over-valued and recommend that shareholders close positions. Price targets currently range from a low of $181 to a Street-high $380 while the stock opened Wednesday’s session more than $25 above the median $294 target. Positive catalysts may be needed to support higher prices, given this placement.

Spotify broke out above 2018 resistance near 200 in June 2020 and stalled just below 300 in July. It broke out above that resistance level in December, after failed September and October attempts, and posted an all-time high at 346.77 on Dec. 11. Price has been pulling back in a flag pattern since that time and could offer a buying opportunity at breakout support, which has narrowly aligned with the 50-day moving average.

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Disclosure: the author held no positions in aforementioned securities at the time of publication.