Spotify (SPOT) Surges Off Support After Analyst Upgrade

Credit Suisse upgraded Luxembourg-based Spotify Technology S.A. (SPOT) from "Neutral" to "Outperform" on Thursday morning, lifting the stock to a seven-day high. The timing couldn't be better because price action has been floundering at June support since a vertical downdraft relinquished more than 55 points in just three sessions. A bounce here could be fortuitous, reaching the bull market and all-time high just below $300.

Key Takeaways

  • Spotify has lost money for three quarters in a row.
  • The stock is bouncing at rectangle support after a sizable decline.
  • A breakdown through support could generate downside into the $200 level.
  • Shareholders have been taking profits since July, giving a slight edge to bears.

The European streamer has lost money in the past three quarters, compounded by a much worse-than-expected loss in the three months ending on June 30. Revenue grew 13% year over year during this period, also missing estimates while contributing to a capital exodus that has now dropped accumulation readings to three-month lows. Monthly active user (MAU) data offered a rare bright spot, growing 29% year over year, but weak guidance gave investors no reasons to get on board.

Spotify rivals have posted exceptional quarterly results in recent months, with pandemic shutdowns and quarantines contributing to their bottom lines. It appears that the streaming company has missed a golden opportunity to reach sustained profitability, but the uptrend is holding intact, at least for now. A breakdown through recent lows in the $230s would alter that equation, confirming an intermediate downtrend that could book substantial downside.

Wall Street is growing more cautious on the long-term outlook for Spotify, with a "Moderate Buy" rating on the stock based upon 13 "Buy," 7 "Hold," and 4 "Sell" recommendations. Price targets currently range from a low of $172 to a Street-high $357, while the stock is set to open Thursday's session about $15 below the median $270 target. There's some upside potential in this placement, but a breakout to new highs is unlikely until quarterly metrics show substantial improvement.

Outperform is commonly used as a rating given by analysts who publicly research and recommend securities. If they change their rating on a particular security to "Outperform" from "Market Perform" or even "Underperform," then something has changed in their analysis that makes them believe the security will produce higher returns, for the foreseeable future, than the major market indexes.

Spotify Daily Chart (2018 – 2020)

Chart showing the share price performance of Spotify Technology S.A. (SPOT)
TradingView.com

The company came public on the U.S. exchanges at $140 in April 2018 and entered an immediate uptrend that topped out just below $200 in July. The subsequent decline sliced through the IPO opening print in October before bottoming out at an all-time low near $100 in December. A bounce into March 2019 stalled near $150, marking a resistance level that repelled August, November, and January 2020 breakout attempts.

The stock tested the 2018 low for the second time in March 2020 and turned sharply higher, breaking out above 2019 resistance in May. The momentum crowd then jumped on board, carving a vertical advance that mounted the 2018 high in June. The rally reversed near $300 ahead of July earnings, yielding a decline that found support near $240. It tested that level once again last week, adding another leg to a broad rectangle pattern.

A relatively simple two-step strategy could work well here, initially buying rectangle support while selling rectangle resistance. Then shift to a trend-following approach after a breakout above resistance or a selloff through support. Bears hold a small advantage in this bilateral equation because the stock has been in distribution mode since July and has entered a monthly-scale sell cycle that is targeting the unfilled June gap through $200.

A rectangle is a technical analysis pattern made on a chart. The term refers to an instance in which the price of a security is trading within a bounded range where the levels of resistance and support are parallel to each other, resembling the shape of a rectangle. 

The Bottom Line

Spotify stock is getting a lift after a Credit Suisse upgrade, delaying a potential breakdown that could target the $200 level.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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