The BuyChart of the day: Spotify Expectations

We’ve been holders of Spotify because we consider them to be a global dominator – with all the makings of being the winner-take-all, well, winner in the Android phone world (which is about 80% of smartphones around the world). It hasn’t been our best bet so far. The stock tanked again yesterday because it fell short on earnings expectations. We’ve seen this with other streaming companies (like Netflix); their stocks have very high expectations baked into them. So, anything short of spectacular numbers pulls down the stock.

Here were the highlights from yesterday’s earnings call:

1. MAU (monthly active users) increased to a record level of 551 million – a growth of 27% year over year. Ad-supported users grew by 34% to 343 million. And paid subscribers grew by 17% to 220 million.
2. Pricing increase announced (in 50 markets) – like Netflix and Disney. Management doesn’t expect this to materially impact growth in MAUs.
3. Costs still haven’t come down. Cost reduction plans were announced in Q1 but they’re yet to materialize. Operating costs are still growing by double digits, which obviously eats into earnings growth.

The latest Spotify numbers have percolated through the Buycaster. We’ve shown all the main charts below because we wanted to highlight the fact that SPOT has a reasonably high Sanity rating but a low Safety rating. So, the revenue growth expectations baked into the stock seem reasonable. But in case Spotify’s future revenue growth turns out to be much lower than it has been in the past, the stock price will drop by about 50%. Only a reduction in costs can boost its overall rating.

The key message for us (since we’re in the process of updating our old Spotify thesis) is that if we factor in lower Operating Costs growth numbers, how much will the Buycast decrease and, therefore, how much will the Buycaster Rating increase? Enough to keep holding the stock?  We did this kind of scenario analysis for Disney. We will publish our updated Spotify Thesis in a couple of weeks.

The BuyTheme of the day: Media & Entertainment

Just zooming out from Spotify, here’s how companies with major streaming businesses look in the Buycaster – with the Buycaster Rating along with the Buffett Ratings and the Wall Street Ratings.

Macro Dose: No fear

There seems to be a general air of confusion and fear in the market. The bond markets seem to have priced in an aggressive Fed who will raise rates this week, and thereby trigger an inevitable recession in the coming months. But the equity markets don’t seem worried – at least if we go by the most popular “fear index” on Wall Street: The VIX Index. 

The VIX Index charts the option-implied volatility of the S&P 500 Index. That’s a mouthful. Basically, it surveys all the active Call and Put options on the S&P 500 and squeezes out the volatility (the most important variable in option pricing) in those option pricing models. It back-solves, much like we in our Buycaster. Crudely speaking, VIX is a gauge for future volatility. Generally, a low VIX number implies a bullish market. And it’s pretty low now.