Audio streaming giant Spotify Technology S.A. (NYSE: SPOT) is about to enter fourth month of massive rallies that have seen shares rise from around $500 in early April to nearly $750 in late June.
With a roughly 50% improvement in stock price during that time, the subscription-based streaming platform adds to more modest and inconsistent gains achieved in the first months of the year for a year-to-date (YTD) return of about 64%.
The big question for investors is where Spotify can go from here. Analysts have somewhat mixed opinions on SPOT stock: 20 out of 29 have rated it a Buy, eight have issued a Hold, and just one has marked it a Sell. The consensus price target sits around $630, 16% below where the stock is currently trading.
When considering whether the massive Spotify rally can continue to outperform the broader tech sector, investors should keep in mind some of the new tools and services the company is preparing to launch, the risk of regulatory push-back, and, of course, the company's underlying financial performance.
Lossless Audio and Import Tool Could Retain and Draw Customers
Spotify is hard at work preparing two new offerings that will likely have strong—if niche—appeal for some users.
First, after several years of delays, the company is about to launch a lossless audio tier. Though many users may not pay particular attention to a new hi-fi offering in Spotify's services line-up, lossless audio would bring Spotify's platform in line with competitors like Apple Music and Amazon Music.
Second, Spotify is developing a music import tool that may allow users to import playlists and other files from other music players. For a vocal group of Spotify users, this has been a limiting factor for the streaming giant in drawing new customers who are reluctant to lose their music history on another service, or to pay a third-party service to transfer it.
While both tools have generated buzz, neither has an official release date. And as of now, it's unclear whether they’ll launch at all.
Regulatory Risks Rise
At the same time, Spotify faces growing scrutiny from U.S. regulators on allegations it converted premium accounts to a more expensive bundled plan that combined music streaming with audiobooks without consent. This bundle may also qualify for reduced royalty payments under certain regulations, fueling calls for closer oversight.
Strong Financials, but Signs of Overvaluation
Spotify's latest earnings report was also somewhat mixed. Earnings per share (EPS) underperformed at $1.13, falling far short of an expected $2.29. However, the quarterly revenue of $4.4 billion topped analyst predictions and represented a solid increase of more than 15% year-over-year.
To be fair, analyst expectations for Spotify's financial performance are quite high, particularly as the company is anticipated to increase additional subscription plan prices outside the United States this year.
At a trailing price-to-earnings (P/E) ratio of more than 124, it's difficult to argue that Spotify shares are priced at anything other than a premium. Of course, if analyst expectations of more than 27% earnings growth potential do come to pass, it may be that there's still room for the stock to grow in the near term.
And there are other factors that may impact Spotify's future financials. The company is working to lower costs and grow its ad sales, and ad-supported revenue has been increasing. The company has also effectively leveraged artificial intelligence (AI) to cut costs and enhance user engagement, helping drive 12% year-over-year subscriber growth in the first quarter. Also during that period, Spotify significantly boosted its gross margin by about 400 basis points.
At a price-to-sales ratio of 9.06, Spotify is deep into overvalued territory by traditional metrics. Investors willing to overlook that might find numerous reasons to be encouraged by the company's financials. But all rallies must end at some point, so caution is warranted.
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