By now, Spotify (NYSE:SPOT) investors know the story. SPOT stock is down 65% from its 52-week high; 55% in 2022 and 25% in the last month. It’s fair to say that taking profits from a stock that jumped 149% from its pandemic low is expected. However, the sell-off is now starting to look overdone. But for the time being investors don’t care.
In early April, I offered my opinion that Spotify was getting lumped in with Netflix (NASDAQ:NFLX). So I would have thought that the company’s earnings report would disprove that idea. After all, Spotify managed to grow users.
And the addition of 182 monthly active users (MAUs) was only slightly lower than the 183 MAUs that analysts expected. There’s also some concern that the company will only maintain its current margins rather than increase its margins.
This seems to be a case that investors looking for any reason to sell. And Spotify gave them reason to do that. That may be too simple of an answer for some, but sometimes investing doesn’t have to be hard.
I appreciate that Chief Executive Officer Daniel Ek is recently putting his money where his mouth is by buying shares of SPOT stock. I also agree with his contention that a key difference between Spotify and Netflix is that Spotify already has “hundreds of millions of pieces of content.”
However, a key piece of the company’s growth plan is to expand the amount of content that is available on the platform, specifically in the area of podcasts.
As I wrote in April, the company’s flywheel model requires more content. This will lead to more advertising demand. Which will then require more content. And so on and so on.
I didn’t find Spotify’s earnings numbers to be terrible. In fact, I found it be quite the opposite. However, the company will need to show that it can continue to repeat that performance.
If it can, SPOT stock may be a good bargain with shares currently trading below pre-pandemic levels. In fact, it looks like there’s a solid floor building around $95.
Now the question is where’s the ceiling? Investors can wait for another earnings season or two to determine the answer.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.