Is Spotify Stock Poised to Soar? Options Traders Think So

Key Points

• Spotify stock attracted new call option buyers into the company before the earnings announcement.
• This sends a message to investors that these trades could be bullish, and Wall Street analysts agree on a double-digit upside.
• Institutional buyers also like the stock enough to buy in over the past quarter, making the same bullish bet.

Investors usually see one way to get exposure to a stock and the direction in which they expect this stock to move in the future: to buy shares of the stock itself ahead of an event. However, there is another way to get exposed to a company's underlying directional move, which can give investors a certain level of leverage for a big payoff if they’re right.

This is done through stock options, but they have a couple of caveats, such as timing and risk. Investors need to get the direction of the stock right and the specific timing of that move, considering stock options contracts have an expiration date. These two caveats significantly raise the stakes for traders buying these instruments.

Knowing this, Spotify Technology's NYSE: SPOT recent options volume spike can mean something for investors to consider in the coming weeks, especially as the company’s quarterly earnings report is set to come out this month as well. Some may even assume that the recent options positioning might be a way to bet ahead of earnings with a bullish view for reasons investors are about to uncover today.

Why Spotify Stock Is Attracting New Call Option Buyers

Up to four-bit call option buyers came into the market in the past month, buying a net amount of $198,826 worth of contracts. This is only the amount of money put into the trade; now, investors need to account for the leverage inherent in the options contracts, which amplifies the weight these trades have for the future of Spotify stock.

Now, investors need to understand why Spotify is a stock to consider in today’s economy, particularly ahead of earnings. As consumer discretionary stocks like Nike Inc. NYSE: NKE and Lululemon Athletica Inc. NASDAQ: LULU underperform due to weakening consumer conditions, a new business model is taking over.

This model involves subscriptions for reliable and predictable cash flows (equal safety) and low overhead costs. These two factors are often found in the technology sector, where Spotify lives and operates, having both the low costs and subscription model.

As investors like Stanley Druckenmiller express concerns about sustained high inflation in the coming years, markets worry that discretionary items like subscriptions might start to suffer. However, not all subscriptions are made equal, as services like entertainment are typically never canceled, hence why Netflix Inc. NASDAQ: NFLX is up by 11% a day after earnings.

Knowing that Spotify shares the same demand predictability and cash flow stability, investors might want to start betting ahead of time before the company reports its new quarter. These traders are not alone in this view, though. Some on Wall Street have joined the trend to show investors how much momentum potential there is today.

Wall Street's Outlook on Spotify Stock

Even though the stock trades at 95% of its 52-week high level, Wall Street analysts still expect it to trade at new highs in the coming months, perhaps with new earnings being the catalyst to move the stock toward these new targets.

Starting with analysts at Pivotal Research, who recently reiterated their "Buy" rating for Spotify stock, investors can do the math for their new price target of $510 a share. This target calls for a net upside of 33.7% from where the stock trades today, not to mention a new all-time high.

Then there are those at Keycorp calling for a similar $490 price target for Spotify stock, making the new trend clearer for investors to consider moving forward, especially as new traders come into the stock ahead of earnings, building the evidence needed to mix for a potential beat.

These bullish outlooks for Spotify stock aren't that out of touch with reality, as other institutional buyers have come to reiterate the company's new bullish potential. Those at Perpetual Ltd recently boosted their holdings in Spotify stock by 24.3% to net their holdings at up to $279.8 million today.

Then, there are broader markets, sending a clear message to investors. Compared to the business sector's average price-to-earnings (P/E) valuation of 42.6x today, Spotify stock calls for a significant premium of 149.7x P/E today, and that's one factor investors need to lean on.

Remembering that this business model offers not only inflation-beating growth but also stability and predictability, investors should not be surprised to see markets willing to overpay for exposure to this stock. The trend is extended to the stock's price-to-book (P/B) ratio of 26.5x today, compared to the industry's average P/B of 4.8x.