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Spotify’s Bubble Trouble: Why the Music Might Stop for SPOT Stock

Spotify Technology (NYSE:SPOT) is in the financial headlines now, but don’t get distracted from the main issue. SPOT stock may have rallied too far, too fast, so take profits now, if they have any.

The hot topic on Wall Street concerning Spotify Technology is that the company is having a spat with Apple (NASDAQ:AAPL). This is an ongoing conflict that will probably have to play out in Europe’s courts. Don’t obsess over it, though. Focus on Spotify’s financial results, not its share price.

SPOT Stock: Beware the Bubble Trouble

Spotify Technology isn’t a Magnificent Seven company, but it’s certainly a favorite among momentum-focused stock traders. Believe it or not, SPOT stock has doubled in price since mid-August 2023, from $130 then to around $260 recently.

Now, if a company’s share price doubles in less than a year, one should expect that company’s revenue beat Wall Street’s estimate. Did this actually happen with Spotify, though?

Let’s take a look at Spotify’s fourth-quarter fiscal 2023 financial results, which the company released earlier this year. Spotify generated revenue of 3.67 billion euros, which would equate to $3.94 billion. This result falls short of the analysts’ consensus estimate of $3.99 billion in quarterly revenue.

Spotify is unprofitable. Specifically, in Q4 2023, the company reported a net loss of 36 cents per share. Granted, this result beat Wall Street’s prediction that Spotify would lose 40 cents per share. Is this really a major victory, though? Does it justify the bubble-licious price move of SPOT stock?

Spotify Technology’s Optimistic Guidance

Most likely, the market bid up the Spotify Technology share price based on the company’s optimistic guidance, rather than the company’s actual results. As Yahoo! Finance reported, Spotify “guided to a strong Q1 operating income of 180 million euros, well ahead of Wall Street consensus expectations.”

This presents a dangerous scenario. Spotify’s assumption of expectation-beating current-quarter operating income may have already been priced into SPOT stock. This makes the stock vulnerable to a drawdown if Spotify doesn’t live up to its own optimistic expectations.

Remember, Spotify reported an operating loss (not income) of 75 million euros, which would translate to $80.6 million, in fiscal 2023’s fourth quarter. This result includes severance-related and real estate-related charges.

Still, since the company provided ambitious guidance, Spotify really needs to deliver blockbuster results in its next quarterly report.

SPOT Stock: The Moonshot Already Happened

If you’re hoping for a moonshot in Spotify stock, just look at what’s happened since August of last year. The big price move already happened. This happened even though Spotify Technology failed to meet Wall Street’s fourth-quarter revenue estimate.

Looking ahead, the market will probably expect Spotify to deliver an outstanding set of first quarter results. Consider, then, that the risk-to-reward scenario might not be very favorable for Spotify’s current shareholders.

In the final analysis, the wise move is to any profits you might have on SPOT stock, as it’s vulnerable to a pullback in the coming months.

On the date of publication, David Moadel 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.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Motley Fool, Crush the Street, Market Realist, TalkMarkets, TipRanks, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.

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