Can you SPOT the difference?

Spotify fell after exceeding expectations Wall Street Connected Profit Like The Pros Brought to you by: Dear subscriber, It’s not often that a stock pulls back after beating on earnings and outlook. Yet, Spotify (SPOT) did just that. That might help explain why our TrackstarIQ data picked up marginal interest after the typical earnings search surge. Shares are off more than 40% from their February highs. Bears worry that Spotify doesn’t have a competitive advantage. Bulls say the low churn rate and continued engagement leave plenty of upside potential. So who’s right? Let’s find out. Spotify’s basics Spotify was founded back in 2006 in Sweden. Yet, it wasn’t until 2018 that the company was listed through their IPO in the U.S. The streaming giant generates revenues through advertising and premium subscriptions. Surprisingly, premium services are their largest revenue segment. What’s not immediately apparent is how crucial the advertising side is to the premium. 60% of the premium subscribers come from the ad-supported services sales funnel, allowing Spotify to scale up quickly. That’s why despite the poor margins, Spotify keeps investing in their ad-supported business. Additionally, the company is making heavy investments in exclusive content, especially in the podcast arena. The problem is the low-margin ad business grew at 46% YOY while premium only rose 14%. That primes the sales funnel but hurts their current profitability. Profitability concerns You’ll notice from the table above that Spotify doesn’t turn a profit. However, they generate cash from operations at a clip of $300M-$500M...or so it might seem. Notice that their largest line item is finance costs. When you look up the breakdown, you find the following table: Part of those movements are foreign exchange hedges since the company transacts all over the globe. The rest are related to warrants and other derivatives. Yet, there’s something else most folks forget about. Spotify owns 9% of Chinese giant Tencent while Tencent owns 7.5% in Spotify. You see, back in 2017, Tencent tried and failed to buy Spotify. Instead, they did an equity swap. Effectively, they own $2.6 billion worth of Tencent stock. Sometimes that helps and sometimes it hurts their bottom line. The important point is that their cash flow statements provide a reasonably accurate representation of their profitability. One way to look at them is their operating cash flow per share which comes in at $2.15. If somehow $2.15 was their EPS, you’d still be left with a 100x P/E valuation. That’s a tough pill to swallow when their 5-year average revenue growth is 32%. And if you look at Free cash flow per share, the most recent measure puts them at $1.57. Again, still pricey. Our hot take It’s tough to love the stock at these valuations, even when you take growth into account. You could make an argument that a discounted cash flow stream analysis might support higher share prices. But you’d have to make some generous assumptions about free cash flow growth that hasn’t materialized yet. Sponsored [Sports betting meets company trading]( Sporttrade is the first legal sports betting exchange available in America. Built like a financial exchange, it allows customers to trade on sports outcomes by buying and selling contracts just like trading companies. [Sign up here.]( What we’re watching [Wall Street Connected: Goldman Sachs]( A look at Goldman Sachs, the world famous global financial holding company. [Watch Now]( OUR RECENT POSTS [Circle the Square]( Jack Dorsey goes for gold [Read more]( [Bet on oil the right way]( Understanding energy ETFs [Read more]( - The Editorial Staff # [submit to reddit]( [submit to reddit]( [submit to reddit]( To ensure delivery of all emails, [whitelist us](. Update your email preferences or unsubscribe [here](#). View our privacy policy [here](#). Copyright ©2021 InvestingChannel. All rights reserved. 1325 Avenue of the Americas, Floor 27 & 28 New York, New York 10019 Disclaimer: This is not investment advice. This InvestingChannel, Inc. newsletter is for information purposes only and opinion-based. Futures, forex, stock, and options trading are not appropriate for all investors. There is a substantial risk of loss associated with trading these markets. Losses can and will occur. No system or methodology has ever been developed that can ensure returns or against losses. No representation or implication is being made that using any of these methodologies or systems will generate returns or ensure against losses. Investors should be cautious about any and all investments and are advised to conduct their own due diligence prior to making any investment decisions. [Link](