Spotify Red Ink Could Trigger Selloff

Luxembourg’s Spotify Technology S.A. (SPOT) reports Q4 2020 earnings in Wednesday’s pre-market, with analysts expecting the European music service to report a loss of $0.55 per-share on $2.15 billion in revenue. If met, earnings-per-share (EPS) will mark a 50% loss reduction compared to the same quarter in 2020. The stock sold off more than 4% in October after missing Q3 top and bottom line estimates, even though revenue grew 14% year-over-year.

Profits Still Elusive

The musical disruptor is growing rapidly but not booking profits, posting losses in the last four quarters despite healthy revenue expansion. In turn, this failure is undermining bullish sentiment about the service’s long-term outlook. The pandemic has compounded this bearish view because, theoretically at least, lockdowns and stay-at-home orders should have super-charged Spotify’s earnings-per-share growth since March 2020.

Spotify invests in new markets that should generate healthy revenue streams in coming quarters but these initiatives will continue to pressure EPS in the short-term. It just launched the service in South Korea, which is the sixth largest musical market in the world. As the company noted in a Feb. 1 release, the share of K-Pop listening on the platform has increased by more than 2,000% since it debuted the first K-Pop playlist in 2014.

Wall Street and Technical Outlook

Wall Street consensus has deteriorated in the last three months, dropping to a ‘Hold’ rating, based upon 11 ‘Buy’, 1 ‘Overweight’, 10 ‘Hold’, and 1 ‘Underweight’ recommendation. More importantly, 6 analysts recommend that shareholders close positions and move to the sidelines. Price targets now range from a low of $310 to a Street-high $428 while the stock opened Tuesday’s U.S. session more than $23 below the median $363 target.

Spotify broke out above July 2020 resistance at 299.67 in December 2020 and posted an all-time high at 370.95 on Jan. 13. The stock closed at the 50-day moving average on Monday, after falling 16%, and bounced into the 340s in Tuesday’s session. The On Balance Volume (OBV) accumulation-distribution indicator topped out in July 2020 and has gone comatose since October, suggesting that short-term catalysts will generate out-sized reactions.

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