Spotify Technology (NYSE: Spot) reported impressive revenue last week, with a 14% year-over-year increase in paid members, 19% in monthly active users, and 20% in revenue. Spotify turned a profit of $1.05 per share in the first quarter of 2024 from a loss a year earlier.
on wednesday, deutsche bank He encouraged investors to buy Spotify's stock, giving him the highest price target for Spotify among Wall Street analysts at $400 a share.
Is Spotify stock a buy?
Key to Deutsche Bank's Buy rating on Spotify was the streaming music company's confirmation that gross margins were still rising, reaching 27.6% in the first quarter. Management wants to reach 30% gross profit margin between 2025 and 2027, and the first quarter results were very close to that level, so the chances of Spotify hitting that goal within the next year are slim. At least I think so.
Now, you can see that if your gross profit margin improves and your cost management improves, your operating profit and net profit will also improve. Deutsche Bank predicts that as Spotify proves it can meet these goals, more analysts will raise their stock prices, and Spotify's stock price will rise further. Therefore, the target price is $400.
But exactly how much profit does Spotify need to make to justify its $400 share price? Using the standard PEG ratio approach to valuation, Let's assume that Wall Street's consensus forecast is correct. Spotify will grow at 38% annually over the next five years. Divide $400 by 38 and you get $10.52. So, for Spotify to be worth $400 per share, it would currently have to earn about $10.52 per share.
That's the problem.
In the first quarter, Spotify earned $1.05 per share. Annualized over four quarters, that's $4.20 per share, or less than half the share price needed to justify a $400 share price. I view Spotify stock as nearly 100% overvalued at current levels, even assuming that earnings trend upward throughout this year.
Because of this, I conclude that Spotify stock is not a buy.
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Rich Smith has no position in any stocks mentioned. The Motley Fool is involved with and endorses his Spotify technology. The Motley Fool has a disclosure policy.
Will Spotify stock reach $400? 1 Wall Street analysts think so.Originally published by The Motley Fool
