Music streaming service Spotify announced currently that it
will spend up to $ 1 billion by April 21, 2026, to buy back its own shares. The dollar amount represents just under 2.5% of Spotify's market capitalization,
with the company valued at $ 41.06 billion this morning as its shares rose 5.1%
following news of the buyback.
A public company that uses a portion of its cash to buy back
its shares is nothing new. Many publicly traded companies, including Apple,
Alphabet, and Microsoft, have active share buyback programs, and you can often
see mature or near-mature companies spending a portion of their balance sheet
or a regular percentage of their free cash flow to buy out yours. capital.
The goal of such pains is to reoccurrence the money to
shareholders. Buybacks, along with dividends, are some of the main ways
companies can use their wealth to reward shareholders. In addition, by buying
their own shares, companies can increase the value of their individual shares.
By limiting the number of shares outstanding, the number of shares in the
company decreases, and therefore, the value of each share in theory increases
as it makes up the majority of the corporation's property.
Spotify has traded at $ 387.44 each over the past 12 months,
but it is now only $ 215.84, including today's earnings. From that point of
view, watching Spotify decide to put in some money to buy home equity makes
sense - the company buys cheap.
But if you ask a newly incorporated company what it plans to
do with its surplus cash, buybacks are often not the answer. For example,
TechCrunch enquired Root Insurance CEO Alex Timm if his company intends to use
cash reserves to buy equity capital following the recent second quarter 2021
profit and loss statement. Root has declined in recent months, possibly making
this an attractive time for shareholder rewards through buyback. Timm objected
to the idea, stating instead that his company was built for the long term. This
means that the money is for growth, not for the growth of shareholder income.
But isn't Spotify still a growing company? This is certainly
not appreciated due to its benefits. For example, in the first half of 2021,
Spotify posted a net profit of just 3 million euros on revenues of 4.5 billion
euros.
If Spotify remains a growth-focused company, shouldn't it be
saving its capital to invest in exclusive podcasts and the like - an effort
that could enable it to price in the future and drive revenue and gross
margin growth over time??
To answer this inquiry, we will need to check the company's
balance sheet. Based on your Q2 2021 earnings, here are the key numbers:
Spotify ended the second quarter with "€ 3.1 billion in
cash and cash equivalents, limited cash, and short-term investment."
And in the second quarter, Spotify generated € 34 million in
free cash flow. This figure is up 7 million euros over the previous year,
despite “higher working capital requirements driven by payments from selected
licensors (deferred from the first quarter), payments related to podcasts and
higher advertising receivables”.
Simply put, despite paying for the effort that is generally
seen as key to Spotify's long-term ability to increase gross margins and thus
net profitability, the company is still wasting money. And thanks to its huge
bank account, which is not very profitable due to globally low prices for cash
and cash equivalents, Spotify uses some of its funds to buy back shares.
By spending a billion greenbacks over the next few years,
Spotify won't do any significant damage to its monetary position. In fact, he
will still be incredibly rich in cash. However, this move can help protect its
valuation and please active investors. Plus, because the company is buying its
shares at a stable discount to its recent market value, it could be closing
something like a deal given Spotify's long-term belief in the value of its own
business.
Perhaps the best question at this stage is not whether
Spotify is an odd company to decide to share some of its wealth with
shareholders, but why we don't see other tech companies in equilibrium with
neutral cash flows and fat accounts. same.
