Today we’ll walk you through a trade idea with Spotify Technology SA (NYSE: SPOT) that could deliver up to 12% returns in the next 3-6 months.
Spotify Technology S.A., together with its subsidiaries, provides audio streaming services worldwide. It operates in two segments, Premium and Ad-Supported.
Analyst Ratings
According to TipRanks, 15 analysts are offering 12-month price targets for SPOT in the last 3 months. Nine of those analysts rate it a Buy, five rates it a Hold, and two have a sell rating. The average price target offered by these analysts is $297.07, which represents a 16.94% upside from the last price of $254.03.
Source: TipRanks.com
Recent Analyst Ratings | Source: TipRanks.com
Why SPOT is trending?
The shares of SPOT had started moving higher this week after receiving some favorable news regarding its relationship with rival Apple Inc.
Apple, which owns a mobile app store, had announced on Wednesday that it would allow certain applications to directly link to websites that bypass Apple’s payments network. This would allow companies like Spotify to more easily let customers skip Apple’s app store commissions. These commissions typically amounted to around 10% to 20% on all payments made through an application.
This move is also seen as a favorable possible outcome for the ongoing lawsuit between SPOT and Apple Inc. Spotify had sued Apple because it believes it unfairly positions its competing service, Apple Music, on its own devices by including high in-app payment commissions, a slow approval process, and adding restrictions for directly linking to the website on its mobile application (which has now been withdrawn).
With these new concessions from Apple, investors are probably inferring that Apple is on track to lose the lawsuit or settle it in Spotify’s favor, which likely propelled the stock higher.
On the other hand, SPOT has been reporting sluggish premium subscription growth. It may be noted that in the second quarter, 88% of the company’s revenue came from premium music subscriptions, making it a major cause for concern for investors. The company is also yet to report profits. SPOT had reported net losses of €581 million, €186 million, and €78 million, respectively for the years ended December 31, 2020, 2019, and 2018.
However, there are also tailwinds for the stock. To address the challenge with the premium subscription growth, Spotify is currently attempting to move into over 80 new markets in 2021, representing over 1 billion potential new customers around the globe. If successful, this move could help Spotify gain market share globally in the next decade.
Outside of music, Spotify’s second-largest audio category, podcasts, is also growing even faster than its core streaming business. Some estimates have the industry growing at a 30% rate or higher from now until 2028, which would make it one of the largest entertainment categories in the world.
With multiple factors coming into play, here’s how to trade SPOT now.
SPOT Chart
On analysis, the daily chart of SPOT shows that there are multiple bullish indications for the stock.
SPOT – Daily Chart
#1 Bullish ADX and DI: The ADX indicator shows bullishness as the ADX line has started to move up from below –DI and +DI lines. The +DI line and the ADX line are also currently above the –DI line, indicating possible bullishness.
#2 Trading Above MA: The stock is currently trading above its 50-day SMA, which implies that the bulls are currently in control.
#3 MACD Above Signal Line: In the daily chart, the MACD line (light blue color) is currently above the MACD signal line (orange color) which is typically considered bullish.
#4 Bullish Aroon: The value of Aroon Up (orange line) is above 70 while Aroon Down (blue line) is below 30. This indicates possible bullishness.
However, there is also a bearish indication for the stock, as it has been forming a head a shoulders pattern, which is marked in purple color.
Below is the bullish and bearish play for SPOT.
Recommended Bullish Trade (based on the chart)
Buy Levels: If you want to get in on this trade, you can purchase the shares of SPOT above the price of $278.00. This has been marked as a green color dotted line.
Important Note: Make sure that you only enter the trade once the daily close is above the recommended price level.
TP: Our target prices are $290 and $310 in the next 3 to 6 months.
SL: To limit risk, place a stop loss at $270.00.
Note that the stop loss is on a closing basis.
Target Upside: Our target potential upside is 4% to 12% in the next 3-6 months.
For a risk of $8.00, our first target reward is $12.00 and the second target reward is $32.00. This is a nearly 1:2 and 1:4 risk-reward trade.
In other words, this trade offers 2x to 4x more potential upside than downside.
Risks to Consider: The stock may reverse its overall trend if it breaks down from the various support levels and head and shoulder pattern with high volume. The sell-off of the stock could also be triggered in case of any negative news, overall weakness in the market, or any regulatory changes in the sector.
Recommended Bearish Trade (based on the chart)
In case the stock breaks down from the Head and Shoulders Pattern (marked in purple color), it would point to an upcoming short-term correction. In that case, below are the entry level, stop loss level, and target prices.
Sell Level: You can take short positions on SPOT below the price of around $201.00. This sell level is marked as a red color dotted line in the chart.
Important Note: Make sure that you only enter the trade once the daily close is below the recommended price level.
TP: Our target prices are $190 and $180 in the next 3-6 months.
SL: To limit risk, place a stop loss at $206.00. Note that this stop loss is on a closing basis.
Our target potential downside is nearly 6% to 11% in the next 3-6 months.
For a risk of $5.00, our first target reward is $11.00 and the second target reward is $21.00. This is a nearly 1:2 and 1:4 risk-reward trade
In other words, this trade offers nearly 2x to 4x rewards compared to the risks.
Risks to Consider: The stock may reverse its overall trend if it breaks upwards with high volume. The breakout of the stock could be triggered in case of any positive news, overall strength in the market, or any regulatory changes in its sector.
Happy Trading!
— Trades of the Day Research Team
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