The last stock market crashes were as severe as they were short-lived.
We saw this in the spring of 2020, when the shock of the pandemic was almost immediately followed by incredible speculative euphoria; then again two years later, when the valuations of the big names of the new economy such as Meta, Netflix or Spotify collapsed dramatically, only to recover within a few months.
While Meta’s commercial viability has never been in question – notwithstanding its adventures in the “metaverse” – that of the two streaming services mentioned has long been controversial. Both have therefore taken measures to reassure investors: Netflix by cracking down on shared accounts and scaling back content investments, Spotify by raising its prices and drastically cutting costs.
The strategy has paid off for both, as shown by the increase in their stock market valuations. For the Swedish company listed in New York, the number of users and subscribers, margins and cash flows have regularly exceeded analysts’ forecasts over the last four quarters.
As a result, the share price has returned to its highs, and investors who got in in the second half of 2022 – in the midst of the debacle – have made an excellent deal. The ubiquity of the Spotify service, especially among young people, gave keen observers reason to bet on a recovery.
The service has twice as many subscribers as it did five years ago, while the number of its users has almost tripled. These factors strengthen its negotiating position with artists and labels, something that analysts have long questioned. In addition, a premium offer – called Spotify Deluxe – is being tested and has been received positively, according to initial feedback. If the offer takes off, the gain in terms of margins could be significant.
Spotify’s current valuation is in contrast to that of Sirius XM: optimistic, at almost forty times the free cash flow expected for this year. The market has thus moved from creeping pessimism to almost naive optimism. Having proven the viability of its model, the Swedish operator must now provide new evidence of growth to justify this multiple.
