Nell Sweeney

Northeastern University FINA2209 - intended for educational purposes only

[Nell Sweeney @Sum20SPOTCFO]

@ProfLowell #Fin2209 Today, Spotify shares surged 13% to $226.50 after landing a series of podcast deals this week with Kim Kardashian West and Warner Bros., a unit of AT&T Inc. In the past 12 months alone, Spotify's stock has increased 54%. (The Wall Street Journal)

[Nell Sweeney @Sum20SPOTCFO]

@ProfLowell #Fin2209 In addition to the positive FCF dynamics, we maintain a strong liquidity position and are confident in the financial position of the business. At the end of Q1, we made €1.8 billion in cash and cash equivalents, restricted cash, and short term investments.

[Nell Sweeney @Sum20SPOTCFO]

@ProfLowell #Fin2209 Last quarter we called attention to the impact of timing shifts in certain payments to licensors. This shift in working capital inflated Free Cash Flow in Q4 and hoped to reverse this quarter as payments were made. As a result, FCF was €21 million in Q1.

[Nell Sweeney @Sum20SPOTCFO]

@ProfLowell #Fin2209 Our business remains very healthy with more than €1.8 billion in liquidity and we expect to be free cash flow positive for the year. Overall, despite some changes in listening patterns, we are encouraged with the trends we are seeing.

[Nell Sweeney @Sum20SPOTCFO]

@ProfLowell #Fin2209 Spotify Technology has committed $11 million to combat racism, injustice and inequity, following calls from our employees to support the black community that has helped fuel our success.

[Nell Sweeney @Sum20SPOTCFO]

@ProfLowell #Fin2209 For the quarter that ended in March 2020, Spotify’s debt-to-equity ratio was 0.31. Our ratio is ranked lower than 66% of the companies in our industry, which proves that we have not been aggressive in financing our growth with debt.

[Nell Sweeney @Sum20SPOTCFO]

@ProfLowell #Fin2209 Spotify’s cost of equity is 9.0%, which ranks the company high among its competitors at an average cost of equity of 8.5%. Spotify ranks in the 75.0% percentile among the market, resulting in a high rate of return.

[Nell Sweeney @Sum20SPOTCFO]

@ProfLowell #Fin2209 Spotify does not pay dividends, therefore we have a dividend yield of 0.0%. The company is growing rapidly and we believe we can increase value by reinvesting our earnings, which in the long run will be more valuable to our shareholders.

[Nell Sweeney @Sum20SPOTCFO]

@ProfLowell #Fin2209 Spotify's spendings consist predominately on royalty and distribution costs, which are paid to certain record labels, music publishers, and other right holders'. This appears to be going rather well, as Spotify is profitable.

[Nell Sweeney @Sum20SPOTCFO]

@ProfLowell #Fin2209 For the quarter ended in March 2020, Spotify reported an EPS of $-0.22. As of today, Spotify's share price is $182.71. Both of these amounts are lower than the EPS and stock price of the previous two years.

[Nell Sweeney @Sum20SPOTCFO]

@ProfLowell #FIN2209 Over the past 5 years, Spotify has had beta of 1.53, indicating that it's stock is more volatile than the overall market and has a higher risk for investors. Spotify also has a higher return rate and exceed the market rate of 9.9% over the past year.

[Nell Sweeney @Sum20SPOTCFO]

@ProfLowell #Fin2209 Moving forward, Spotify has tremendous top-line growth potential. My modeling suggests that $10 in earnings per share is doable by 2030. Based on a 30-times exit multiple and a 10% annual discount rate, that implies a 2020 price target of less than $130.

[Nell Sweeney @Sum20SPOTCFO]

@ProfLowell #Fin2209 After falling to as low as $110 in the fall, Spotify stock has rebounded in the last few months. The stock nearly hit $160 last week.

[Nell Sweeney @Sum20SPOTCFO]

@ProfLowell #Fin2209 Spotify's stock was down 2.7% to $151.85 after Evercore analyst Benjamin Black downgraded the stock to Underperform from In Line on concerns about its valuation and growth prospects.

[Nell Sweeney @Sum20SPOTCFO]

@ProfLowell #Fin2209 Spotify's revenue rose 28.6% to €6.8 billion in 2019. In a note to shareholders, Spotify reported that its operating income, net income and free cash flow in Q4 all came in positive for the first time in the company's history.

[Nell Sweeney @Sum20SPOTCFO]

@ProfLowell #Fin2209 In today's investment climate, a 5-7% return is more realistic. In order to make more money and have a bigger retirement savings at 65, she could increase the amount of money she invests or how frequently she invests. Ex: she could invest monthly instead of yearly.

[Nell Sweeney @Sum20SPOTCFO]

@ProfLowell #Fin2209 The student's annual savings is $3(365) = $1,095. To calculate her savings at the end of the 65 years, we use the equation $1095 x [(1 + 12%)^(65-20) - 1] / 12% = $1,487,261.89. Therefore, at 65 years old, the student will have $1,487,261.89

[Nell Sweeney @Sum20SPOTCFO]

@ProfLowell #FIN2209 Spotify has a current ratio of 0.92, therefore the company may have difficulty meeting its current obligations. Low values, however, do not indicate a critical problem. If we have good long-term prospects, we'll be able to borrow to meet our obligations.

[Nell Sweeney @Sum20SPOTCFO]

@ProfLowell #Fin2209 We have had a fairly consistent growth rate in recent years. From 2019 to 2020, we've seen a 69 million increase in users (32%) and 30 million increase in subscribers (30%).

[Nell Sweeney @Sum20SPOTCFO]

@ProfLowell #Fin2209 As a frequent user of Spotify, I have chosen to analyze the company to learn more about the business side of the streaming service. Also, Spotify's algorithm seems quite interesting - I'd like to learn about that and what it does for business.