Music streaming service Spotify as we speak stated it should spend as much as $1 billion between now and April 21, 2026 to repurchase its personal shares. The greenback quantity represents just below 2.5% of Spotify’s market cap, with the corporate valued at $41.06 billion this morning as its shares rose 5.1% following the repurchase information.

The firm beforehand executed the same buyback program in 2018.

A public firm utilizing a few of its money to repurchase its shares is nothing new. Many public corporations, together with Apple, Alphabet, and Microsoft, have lively share repurchase packages, and it is not uncommon to see mature or nearly-mature corporations devoting a fraction of their stability sheet or an everyday share of their free money movement to purchasing again their very own fairness.

The objective of such efforts is to return money to shareholders. Buybacks, together with dividends, are among the many key ways in which corporations can use their wealth to reward shareholders. Also, by shopping for their very own inventory, corporations can enhance the worth of their particular person shares. By limiting the shares in circulation, the corporate’s share rely declines and the worth of every share consequently rises, in principle, because it represents a bigger fraction of possession within the company.

Spotify shares have traded as excessive as $387.44 apiece prior to now 12 months, however at the moment are value simply $215.84, inclusive of as we speak’s good points. From that perspective, seeing Spotify determine to deploy some money to repurchase its personal fairness is smart — the corporate is shopping for low.

But for those who ask a lately public firm what it intends to do with its extra money, buybacks are usually not normally the reply. For instance, TechCrunch requested Root Insurance CEO Alex Timm if his firm meant to make use of money reserves to buy its personal fairness after its current Q2 2021 earnings report. Root’s share worth has declined in current months, maybe making it a sexy time to reward shareholders by way of buybacks. Timm demurred on the thought, saying as a substitute that his firm is constructing for the long-term. That interprets to: That money is earmarked for development, not shareholder return.

But isn’t Spotify nonetheless a development firm? It actually isn’t valued on the load of its income. In the primary half of 2021, for instance, Spotify posted internet revenue of a mere €3 million on revenues of €4.5 billion.

If Spotify continues to be a growth-focused firm, shouldn’t it protect its capital to spend money on unique podcasts and the like — efforts that will grant it pricing energy sooner or later and permit for stronger income development and gross margins over time?

To reply that, we’ll should examine the corporate’s stability sheet. From its Q2 2021 earnings, listed here are the important thing numbers:

  • Spotify closed out the second quarter with “€3.1 billion in cash and cash equivalents, restricted cash, and short term investments.”
  • And within the second quarter, Spotify generated free money movement of €34 million. That determine was up €7 million from a 12 months earlier regardless of “higher working capital needs arising from select licensor payments (delayed from Q1), podcast-related payments, and higher ad-receivables”.

More merely, regardless of paying up for efforts which can be usually understood to be key to Spotify’s long-term means to enhance its gross margins — and subsequently its internet profitability — the corporate continues to be throwing off money. And with an enormous checking account incomes little, because of globally low costs for money and equal holdings, Spotify is utilizing a piece of its funds to purchase again inventory.

By spending $1 billion over the following few years, Spotify gained’t materially hurt its money place. Indeed, it should stay extremely cash-rich. However, the transfer might assist defend its valuation and maintain itchy traders glad. Moreover, as the corporate is shopping for its inventory at a agency low cost to the place the market valued it lately, it may get one thing akin to a deal, given Spotify’s long-term religion within the worth of its personal enterprise.

Perhaps the higher query as this juncture is just not whether or not Spotify is a bizarre firm for deciding to interrupt off a bit of its wealth for shareholders, however as a substitute why we aren’t seeing different breakeven-ish tech corporations with impartial money flows and fats accounts doing the identical.