MMA Fanboy Props Up Stock

Remember when apartment hunting used to be fun? As the rental market becomes increasingly difficult, Rentberry aims to disrupt the rental experience via technology and transparency. The San Francisco-based startup created an online rental marketplace bringing landlords & tenants together, eliminating the need for costly real estate agents in the rental niche. On October 28th, Rentberry is closing their Reg A+ on StartEngine, Join over 6,000+ investors already invested in the rental revolution.

Invest in Rentberry before their offering closes on October 28th.

Joe Rogan is a comedian and a big fan of mixed martial arts.

He also runs the #1 podcast on Earth.

This guy has interviewed Elon Musk, Mark Zuckerberg, and Alex Jones. 

He’s outlasted serious controversy that’s claimed so many others.

And Spotify (SPOT) paid him nine figures to get exclusive rights to air his podcast. 

With more and more people listening to podcasts these days, it’s no surprise SPOT is financial advisors’ third-most searched music and podcast company over the last month. 

Shares are off their all-time high by a stunning 77%.

Yet the company generates solid cash flow and has slowly started to turn a quarterly profit.

So is it a good investment?

Spotify’s Business

Spotify offers a digital music and podcast platform. 

It boasts 80 million songs and more than 4 million podcast titles, attracting over 433 million users, including 188 million Spotify Premium subscribers.

The free version uses advertisements to generate revenue.

SPOT breaks down sales between premium subscribers and ad-supported subscribers. 

Both user types have grown at roughly the same rate. In Q2 2022, the firm increased its ad-supported revenue by 31% and its premium subscription revenues by 22%. 

Ad-supported users generate the vast majority of revenue.

Financials

SPOT has more than doubled its revenues from 2017 to 2021, going from $4 billion to $9.6 billion. Right now, the company is on pace for its best year yet.

Its 12-month trailing revenues are $10.7 billion, generating cash flow of $318 million. 

Additionally, SPOT holds $3.5 billion in total cash and has $1.7 billion in total debt. 

Its current ratio of 1.3x hints at nice liquidity should issues arise.

Valuation

SPOT may generate cash, but it has yet to turn an annual profit.

iHeartMedia (IHRT) is in a similar situation. 

But other competitors are profitable. 

For example, Apple (AAPL) has a P/E GAAP ratio of 22.9x, Amazon.com (AMZN)’s is 94.8x, and Sirius XM Holdings (SIRI)’s is 19.3x. Only SIRI is as niche as SPOT or IHRT.

But at a price-to-sales ratio of 1.4x, SPOT is doing better than AAPL, AMZN, and SIRI. Of course, AAPL and AMZN have multiple sources of revenue outside of their music and podcast businesses. 

Profitability

SPOT’s gross margin of25.7% is fairly low, aligning with its pay-for-talent strategy.

As we mentioned, Spotify reportedly spent nine figures to get exclusive rights to air The Joe Rogan Experience. When you look at IHRT’s 62.8% gross profit margin and SIRI’s 50.5%, you have to think there’s something wrong with SPOT. 

SPOT has managed to turn a quarterly profit (earnings per share) from time to time. But it hasn’t been consistent.

Its competitors are doing significantly better and trading at reasonable valuations in some cases.

Growth

However, SPOT has grown faster than its competitors at 24.2% year over year. IHRT is the closest at 16.6% revenue growth, while AAPL’s is 11.6%. 

However, AAPL, IHRT, and SIRI have better EBITDA growth numbers than SPOT because… well, they turn profits.

Our Opinion 5/10

SPOT boasts a market cap of $16 billion.

It hit $10.7 billion in sales the last 12 months. 

Does its stock price deserve to be where it is?

Spotify generates positive cash flow and has killer growth. But it doesn’t generate accounting profits.

The company faces intense competition and needs a major pipeline of great new talent to keep up the pace.

Investors should value SPOT based on lower growth assumptions with positive cash flows that eventually turn into profits.

The current $88 a share is still too rich for that much uncertainty.

Fair value is likely somewhere between $50 and $75 based on cash flows.

• This Stock Pays Buffett 9-Figure Dividends
• Are you waiting until stocks go back to “normal”? (Ad)
• Are You Still in Good Hands with Allstate?
• If It’s Good Enough for Buffett…