Spotify’s stock is too risky, this investor says

Since its IPO in April, investors have had success with Spotify Technology (NYSE:SPOT Quote, Chart), whose share price has risen 13 per cent over the past four months.

But even with the company’s dominance in the music streaming business —Spotify controls two-thirds of the global market— so much of the company’s future earnings are now baked into its share price that Spotify is now too risky a venture, says Ross Healy, portfolio manager at MacNicol & Associates.

Spotify went public on April 3 in an IPO that many saw as groundbreaking, with the Swedish company becoming the largest business to follow a direct listing on the NYSE, rather than the more typical approach of selling shares to institutional investors. Spotify’s ‘DPO’ was expected to result in high volatility in the company’s share price, but so far, that hasn’t been the case. The stock reached its record high on July 26 after releasing its second quarter earnings report and has since pulled back 5.5 per cent.

Healy says that while Spotify may indeed reign supreme within its corner of the entertainment industry, investors would be wise to tread with caution.

“Spotify, in line with all the FAANG stocks and that ilk, has had a wonderful run,” Healy told BNN Bloomberg viewers. “They are broadly considered to be the future of music, the future of retail, the future of entertainment and all the rest of that kind of stuff. However, the prices are now discounting a lot of that future, and Spotify from our point of view would have a huge downside risk if we had weak markets.”

“I would be very cautious about Spotify, as I am about most of the FAANG stocks, with the exclusion of Alphabet,” says Healy.

In its second quarter financials, Spotify reported an uptick in monthly paying subscribers (its main revenue source) from 75 million at the end of Q1 to 83 million by the end of June. The company posted revenues of $1.49 billion, in line with analysts’ expectations, with an EPS loss of $2.54 for the quarter. (All figures in US dollars.)

The stock saw a nice jump earlier this month on the announcement of a deal which will see Spotify become Samsung’s official music streaming partner, a pairing which aims at fortifying Spotify’s resources in the battle against competing streaming services such as those by Apple and Amazon.