At the end of 2022, Spotify had 205 million paying subscribers.
(This is not an article about Spotify)
It also had a €659 million annual operating loss.
Its shares closed the year at $78.95, down 66% from the end of 2021. Its vast customer base had proven that people wanted the service.
It had not settled the question which shareholders cared about: could the company keep enough of its growing revenue to turn a substantial profit?
Revenue climbed from €11.7 billion in 2022 to €15.7 billion in 2024. Gross profit rose faster, from €2.9 billion to €4.7 billion, while annual sales and marketing expense fell.
By 2024 Spotify was reporting €1.37 billion of operating profit. Its stock ended that year at $447.38.
Anyone who bought at the end of 2022 had seen the share price rise 5.7-fold in two years.
Revenue was already growing when the stock was distressed. You could see where the puck was going.
The market changed its mind as more of that growth reached operating profits. Investors who waited until it turned a profit were faced with a much less attractive entry point.
That is the attraction of a recovery investment. It is also the danger: improving sales can disguise a business that will never earn an adequate return.
I have identified a company which is still in the less comfortable point in its recovery sequence.
A shock destroyed much of its original business. It has since rebuilt, sales are growing again, and losses are narrowing.
Full-year profitability remains unproven, but my modelling suggests a good chance of getting there.
As is usually the case in these scenarios, the stock is priced as though the recovery deserves very little credit, while a large balance sheet appears to offer protection.
I have bought shares because the market appears to assign almost no value to the rebuilt operating business.
That is either a mistake we can profit from or a warning I should heed. The price action is starting to suggest it could be the former.
If we’re right, this could offer very compelling returns.
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