Inside Spotify’s Newly Added Risk Factors

Sweden-based Spotify (SPOT) operates an audio streaming platform. It offers both premium and ad-supported streaming services and reaches more than 400 million listeners worldwide.

For Q4 2021, Spotify reported a 24% year-over-year rise in revenue to 2.69 billion euros. The majority of the company’s revenue comes from its premium service but the ad-supported business recorded its strongest performance, with sales rising 40%. The company posted a loss per share of 0.21 euro, marking an improvement from a loss per share of 0.66 euro in the same quarter the previous year.

Spotify continues to seek new growth opportunities. It recently agreed to acquire podcast technology provider Whooshkaa and audiobooks distributor Findaway.

With this in mind, we used TipRanks to take a look at the newly added risk factors for Spotify.

Risk Factors

According to the new TipRanks Risk Factors tool, Spotify’s top risk category is Finance and Corporate, which contains 22 of the total 57 risks identified for the stock. Legal and Regulatory and Ability to Sell are the next two major risk categories, with 11 and 8 risks, respectively. Spotify has recently updated its profile with 7 new risk factors.

The company informs investors that it ended 2021 with $1.5 billion in debt, including 2026 exchangeable notes. It says that it may incur additional debt to meet its future financing needs. The problem is that Spotify’s indebtedness could lead to many adverse consequences, both to the business and shareholders. For example, servicing the debts may use up much-needed cash and reduce the funds available for other purposes. 

The debts may also make the company more vulnerable to adverse changes in economic conditions. As for the exchangeable notes, they may dilute the interests of existing shareholders. Furthermore, Spotify cautions that the terms of its credit agreements could discourage third parties from acquiring it, denying shareholders potentially favorable takeover transactions.

Spotify is making a big push into the podcast business, as recently demonstrated by its Whooshkaa acquisition. However, the company cautions that it may not be successful in monetizing podcasts and other non-music content that it has started to provide. It explains that growth in the podcast segment may require it to modify its infrastructure and change its existing business model, but that still may not guarantee success. Additionally, Spotify mentions that the podcast push may subject it to more regulatory requirements and disputes associated with content acquisition.

Spotify has committed to achieving various environmental, social, and governance (ESG) targets. For example, it aims to achieve net-zero emissions within the next decade.  Although the company expects its ESG commitments to improve its financial performance in the long run, it cautions that there may be setbacks along the way. For example, it may not achieve the goals it has set for itself, and its decisions regarding ESG matters may not align with the expectations of investors. Therefore, Spotify warns that its reputation, business, and financial results may be harmed if its ESG-related actions disappoint. 

Spotify’s stock has declined about 32% year-to-date. In August 2021, Spotify announced a $1 billion share repurchase program, with management explaining that the program will expire in April 2026. 

Analysts’ Take

Barclays analyst Mario Lu recently maintained a Buy rating on Spotify stock but lowered the price target to $280 from $310. Lu’s reduced price target still suggests 68.76% upside potential.

Consensus among analysts is a Moderate Buy based on 16 Buys, 6 Holds, and 1 Sell. The average Spotify price target of $246.55 implies 48.60% upside potential to current levels.

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