Spotify (NYSE: SPOT), a music-streaming service, did not have a successful year in 2021. Indeed, the SPOT stock is still down around 30% from where it started the year. Growth investors who expected this hypergrowth investment to continue to outperform have been disappointed.
SPOT stock, on the other hand, is in the headlines today as a huge gainer. On an otherwise strong day for stocks, the company’s stock price is now up about 6% at the time of writing.
This comes amid rumors that Shopify is considering repurchasing its stock. Spotify has launched a $1 billion share repurchase program, indicating that it feels its stock is undervalued. This looks to be an attempt to reassure investors about Spotify’s fundamental worth. Furthermore, the firm states that this repurchase “is an appealing use of cash, and we continue to see significant potential to develop and build our business based on the strength of our balance sheet.”
Is buying own stocks a new phenomenon?
A lot of fast-growing firms are repurchasing their own stock. This isn’t a new occurrence; in fact, it’s rather prevalent in the tech world. Rather than providing taxable dividends to shareholders, buybacks allow current shareholders to control more of the firm (in percentage terms) without having to acquire new shares. Buybacks had historically been lauded by legendary investors like Warren Buffett, particularly in a down market.
The issue is that we are not in a bear market. Sure, SPOT stock is down 30% so far this year. In the previous year, Spotify shares have gone as high as $387.44 per share, but are now only worth $215.84, including today’s increases.
However, it might be argued that this stock isn’t really “cheap.”
How does it benefit Spotify?
Spotify, on the other hand, appears to be aiming towards that notion. The business is attempting to send a message to the market that SPOT stock is extremely valuable right now.
Others would argue that, as a hypergrowth firm, this $1 billion would be better spent reinvesting in the company’s main business. This money may go a long way toward stimulating future development, whether it’s in the form of further licensing rights or unique podcast material.
Spotify’s management team has indicated that the company’s balance sheet is in excellent shape. Furthermore, the firm thinks it has the money to grow at a faster rate than the market. Investors appear to concur with this attitude today.
Spotify’s financial position will not be substantially harmed by investing $1 billion over the next few years. It will, in fact, continue to be extremely cash-rich. The move, on the other hand, may help the company defend its value and keep antsy investors pleased. Furthermore, given Spotify’s long-term belief in the value of its own business, it might get a deal because it is purchasing its own shares at a significant discount to where the market recently valued it.
