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Spotify (NYSE:SQUARE) the stock is down about 34% year-to-date, significantly underperforming the Nasdaq 100 which lost a more modest 8.9%. The stock has been punished enough for its low forecast of premium subscribers in the first quarter published in early February and Joe Rogan controversy.
As the market rebounds and amid positive company-specific developments, it might be time to shed that bearish bias on SPOT stock in anticipation of a mini run to earnings. The short to medium term trajectory depends on several external developments, including macroeconomic fundamentals and geopolitical tensions that may affect the company’s fundamental performance.
Spotify in the middle of a thick and fast news feed
Spotify has always been nimble in adding features and services aimed at improving user engagement and experience. Last week, the audio streaming service announced an update to its Blend feature, which is a shared playlist born from the desire to make listening more personalized and collaborative. The new update increases the number of people you can merge with up to 10 and also allows users to merge with favorite artists.
Spotify too announced a partnership with Spanish football club FC Barcelona mid-March to be the main sponsor of the latter for four seasons, starting in 2022/2023. The name of the music streaming service will appear on the shirts of the men’s and women’s teams, and will also be linked to the Camp Nou stadium for at least 12 seasons.
In another positive development, Spotify announcement in March, a multi-year agreement with Google’s parent company Alphabet (NASDAQ:GOOG, GOOGL) to give users the choice of paying with Spotify’s payment system or with Google Play billing. Google also allowed a discount from the standard 15% rate it charges developers for subscriptions.
Analysts view the move as a positive for Spotify, both from a margin perspective and from a subscriber growth perspective due to the seamless integration that comes with paying Spotify direct.
What short-term promises for Spotify
The next key catalyst will likely be Spotify’s first quarter earnings release, scheduled for April 27. Investors, as usual, will remain focused on the evolution of the number of premium subscribers, in particular due to the decision of the Swedish company to stop services in Ukraine.
Spotify is on track to show strong key performance indicators in the first trimester, UBS (NYSE:UBS) said analyst Batya Levi in a recent note. Google’s agreement to allow in-app billing will limit friction in converting ad-supported subscribers to premium subscribers, the analyst said.
Margin expansion is key to making the Spotify story attractive to investors. The company reported a gross margin of 26.5% in the fourth quarter, flat from the year-ago period. The company blamed flat margins on non-music and other content costs and publishing rate increases.
Spotify’s two-sided market – the paid promotion tools it offers to artists and labels and the due diligence with a few major global labels – will likely drive margin expansion, Evercore ISI analyst Mark Mahaney said in a recent note. The company can improve gross margin to 30% plus in 2024, a year ahead of when the street currently models, he added.
Conclusion on SPOT actions
As the market digests these catalysts, SPOT stock could gain momentum over the next two weeks before turning a profit. From then on, the trajectory will be dictated by several dynamics, both internal to the company and external.
A the added attraction is the stock’s cheap valuation. Spotify’s Price-to-Sales (P/S) ratio is now 2.63, closer to the all-time low of 2.12 and a far cry from the peak of 7.5 times. The analysts’ average price target for SPOT shares is $242.91, according to TipRanks. This suggests there is room for upside of approximately 58% from current levels.
Technically, SPOT stock has consolidated after rebounding from its mid-March low. A convincing break above long-term resistance around $155 could help the stock launch a rally. The 14-day Relative Strength Index, an indicator of momentum, is at 35, confirming the oversold nature of the stock.
At the date of publication, Shanthi Rexaline did not hold (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.