Music streaming service Spotify today said it will spend up to $1 billion between now and April 21, 2026 to repurchase its own shares. The dollar amount represents just under 2.5% of Spotifyâ€™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.
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, and 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.
The goal of such efforts is to return cash to shareholders. 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 shares in circulation, the companyâ€™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.
Spotify shares have traded as high as $387.44 apiece in the past 12 months, but are now worth just $215.84, inclusive of todayâ€™s gains. From that perspective, seeing Spotify decide to deploy some cash to repurchase its own equity makes sense â€” the company is buying low.
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, TechCrunch asked Root Insurance CEO Alex Timm if his company intended to use cash reserves to purchase its own equity after its recent Q2 2021 earnings report. Rootâ€™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 to: That cash is earmarked for growth, not shareholder return.
But isnâ€™t Spotify still a growth company? It certainly isnâ€™t valued on the weight of its profits. In the first half of 2021, for example, Spotify posted net profit of a mere â‚¬3 million on revenues of â‚¬4.5 billion.
If Spotify is still a growth-focused company, shouldnâ€™t it preserve its capital to invest in exclusive podcasts and the like â€” efforts that may grant it pricing power in the future and allow for stronger revenue growth and gross margins over time?
To answer that, weâ€™ll have to check the companyâ€™s balance sheet. From its Q2 2021 earnings, here are the key numbers:
Spotify closed out the second quarter with â€œâ‚¬3.1 billion in cash and cash equivalents, restricted cash, and short term investments.â€
And in the second quarter, Spotify generated free cash flow of â‚¬34 million. That figure was up â‚¬7 million from a year earlier despite â€œhigher working capital needs arising from select licensor payments (delayed from Q1), podcast-related payments, and higher ad-receivablesâ€.
More simply, despite paying up for efforts that are generally understood to be key to Spotifyâ€™s long-term ability to improve its gross margins â€” and therefore its net profitability â€” 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.
By spending $1 billion over the next few years, Spotify wonâ€™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 Spotifyâ€™s long-term faith in the value of its own business.
Perhaps the better question at this juncture is not whether Spotify is a weird company for deciding to break off a piece of its wealth for shareholders, but instead why we arenâ€™t seeing other breakeven-ish tech companies with neutral cash flows and fat accounts doing the same.