Spotify To Spend $1B Buying Its Own Stock

Music streaming platform –Spotify, earlier today announces it will spend $1 billion between now and April 21, 2026, to repurchase its own shares. Repurchases of up to 10,000,000 of the Company’s ordinary shares between Q3 and April of 2026 have been authorized The dollar amount represents just under 2.5% of Spotify’s market cap, with the company valued at $41.06 billion this morning as its shares rose 5.1% following the repurchase news. The company previously executed a similar buyback program in 2018.  The audio streaming platform in June announced the launch of its live audio chat app and Clubhouse competition Greenroom

A public company using some of its cash to repurchase its shares is nothing new. Many public companies, including Apple, Alphabet, and Microsoft, have active share repurchase programs. The goal of such efforts is to return cash to shareholders. It is common to see mature or nearly mature companies devoting a fraction of their balance sheet or a regular percentage of their free cash flow to buying back their own equity. Buybacks, along with dividends, are among the key ways that companies can use their wealth to reward shareholders. Also, by buying their own stock, companies can boost the value of their individual shares. By limiting the number of shares in circulation, the company’s share count declines and the value of each share consequently rises, in theory, as it represents a larger fraction of ownership in the corporation. The billion-dollar buyback comes at a time when the world’s top streamer is the subject of increasing pressure to change how royalties are calculated and pay artists more.

In the past 12 months, Spotify shares were as high as $387.44/share, but today it’s worth about $215.84, inclusive of today’s gains. From that perspective, seeing Spotify decide to deploy some cash to repurchase its own equity makes a lot of sense — the company is buying low.  In a statement by Paul Vogel, Chief Financial Officer at Spotify announcing the buyback, he says “This announcement demonstrates our confidence in Spotify’s business and the growth opportunities we see over the long term.” He added, “We believe this is an attractive use of capital, and based on the strength of our balance sheet, we continue to see ample opportunity to invest and grow our business.” By spending $1 billion over the next few years, Spotify won’t materially harm its cash position. Indeed, it will remain incredibly cash-rich. However, the move may help defend its valuation and keep itchy investors happy. Moreover, as the company is buying its stock at a firm discount to where the market valued it recently, it could get something akin to a deal, given Spotify’s long-term faith in the value of its own business. Stock buyback benefits shareholders by increasing the percentage of ownership of each investor by reducing the total number of outstanding shares. In short, the company is concentrating its shareholder value rather than diluting it.

“Buybacks increase a company’s earnings per share without an actual increase in profits. This would, in turn, drop the [price-earnings] ratio, making the company look more attractive,” says Winston Chua, an analyst at EPFR Global. But if you ask a recently public company what it intends to do with its excess cash, buybacks are not usually the answer. For example, Root Insurance CEO Alex Timm was asked if his company intended to use cash reserves to purchase its own equity after its recent Q2 2021 earnings report. Root’s share price has declined in recent months, perhaps making it an attractive time to reward shareholders through buybacks. Timm demurred on the idea, saying instead that his company is building for the long-term. That translates that cash is earmarked for growth, not shareholder return.

But isn’t Spotify still a growth company? It certainly isn’t valued on the weight of its profits. In the first half of 2021, for example, Spotify posted a net profit of a mere €3 million on revenues of €4.5 billion. If Spotify is still a growth-focused company, shouldn’t it preserve its capital to invest in exclusive podcasts and the like — efforts that may grant it pricing power in the future and allow for stronger revenue growth and gross margins over time?

To answer that, we’ll have to check the company’s balance sheet. From its Q2 2021 earnings, here are the key numbers:

• Spotify closed out the second quarter with “€3.1 billion in cash and cash equivalents, restricted cash, and short term investments.”
• And in the second quarter, Spotify generated a free cash flow of €34 million. That figure was up €7 million from a year earlier despite “higher working capital needs arising from select licensor payments (delayed from Q1), podcast-related payments, and higher ad-receivables”.

More simply, despite paying up for efforts that are generally understood to be key to Spotify’s long-term ability to improve its gross margins — and therefore its net profitability — the company is still throwing off cash. And with a huge bank account earning little, thanks to globally low prices for cash and equivalent holdings, Spotify is using a chunk of its funds to buy back stock. Perhaps the better question is not whether Spotify is a weird company for deciding to break off a piece of its wealth for shareholders, but instead why we aren’t seeing other breakeven-ish tech companies with neutral cash flows and fat accounts doing the same.