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Spotify (NYSE: $SPOT) Spikes on Strong Q4 User Surge as It Navigates Path to Profitability

Spotify Technology S.A. (NYSE $SPOT)

Spotify (NYSE: $SPOT) is a popular digital platform that offers access to music, podcasts, and video streaming. Users of the platform have access to millions of songs and other types of content from creators worldwide. It is accessible as a free app with basic features and as a paid version that offers access to premium features. 

Since its launch in 2008, Spotify has transformed the music streaming experience, and in 2022, it expanded its audio offering with an expansion into audiobooks.  It has over 600 million users globally, with over 230 million paying subscribers in 184 markets. 

Spotify released its fourth quarter fiscal 2023 results to a positive reception on Tuesday, February 6, 2024, before markets opened. 

Q4 Earnings Results 

Spotify’s fourth-quarter results showed strong user growth but fell short of revenue projections. The Sweden-based company reported revenue of 3.67 billion euros ($3.94B), up 16%, or 20% on an FX-neutral basis year-over-year, in line with their forecast but below analyst estimates of 3.72 billion euros ($4B). It had a net loss per share of 0.36 euros ($0.39). 

Their full-year revenue came in at  13.25 billion euros ($14.25B), a 13% increase, or 16% on an FX-neutral basis Y/Y. Its net loss per share was 2.73 euros ($2.94).

It reported a gross margin of 26.7%, above its guidance by 0.1%, due to favorable numbers in its podcast business. Spotify had an operating loss of 75 million euros ($80.65M) for the quarter, better than their guidance due to lower-than-forecast marketing spending, personnel, and related costs. 

The operating loss was impacted by 143 million euros ($153.78M) in restructuring costs announced in December 2023. Excluding those costs, they generated an adjusted operating profit of 68 million euros ($73.13M), more than double what they reported in Q3. 

The company reported a free cash flow of 396 million euros ($425.86M) at the end of Q4, with cash and cash equivalents, restricted cash, and short-term investments of 4.3 billion euros ($4.62B). While some of the strength in its balance sheet was down to good timing, the company is confident they are in a new era of expanding cash generation potential. 

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SPotify’s Segment Performance 

Premium subscriber revenue increased 17% Y/Y, or 21% on an FX-neutral basis, to 3.17 billion euros ($3.41B). The rise in subscriber revenue was driven by subscriber growth of 15% Y/Y and a 1% Y/Y increase in revenue per premium user to 4.60 euros ($.4.94) or 5% on an FX-neutral basis. 

The add-supported segment brought in 501 million euros ($538.77M) in revenue, a 12% rise Y/Y, or 17% on an X-neutral basis. The increase in ad-supported revenue was driven by podcast ad revenue, which grew by double digits. However, revenue was partially offset by softer pricing. The Spotify Audience Network experienced double-digit growth Q/Q in advertisers, participating publishers, and shows for the quarter.

Monthly Active Users Exceed Expectations

Spotify’s monthly active users (MAUs) reached 602 million globally. This figure beat the company’s guidance and Wall Street forecasts of 601 million MAUs. The 23% year-over-year growth in MAUs was observed across all geographic regions, indicating the continued popularity of Spotify’s streaming offerings. Premium subscribers also exceeded expectations at 236 million, up 15% and surpassing estimates of 235 million.  

Podcast Investments Weigh on Profits

 In recent years, Spotify has invested heavily in podcasting through exclusive deals with top hosts like Joe Rogan. While these deals have succeeded in boosting podcast listening and advertising revenue, CEO Daniel Ek admitted they hurt profitability in 2023.  

However, Ek stated the company plans to reverse course and reach steady podcast profitability by 2024. Management expressed optimism about favorable revenue and earnings trends. 

In his remarks, Ek pointed out that in 2023, they had used a three-pronged approach to growth revenue. It entailed growing their user base, creating new revenue streams, and increasing prices. He said that in 2024 that this strategy could change in 2024. The company plans to shift back and forth amongst prioritizing the three elements based on various considerations. 

Price Hikes and Layoffs Part of Profit Focus

Spotify has implemented price increases for premium subscribers in specific markets to improve financial performance. The company has also recently conducted substantial layoffs, eliminating over 600 jobs. These steps show a heightened prioritization of Spotify’s bottom line as it aims to reach 1 billion users by 2030.  

Outlook 

While near-term user guidance lagged estimates, management sees growth rebounding and projects 239 million premium subscribers for the first quarter of fiscal 2024, a 3 million Q/Q increase. They expect MAUs to grow to 618 million, a 16 million increase Q/Q. 

The company is expecting an FX-neutral growth in revenue of 20% Y/Y, or 3.6 billion euros ($3.87B) in total revenue. They expect a gross margin of 26.4% and an operating profit of 180 million euros ($193.57M). 

While they did not provide full-year guidance, they expect a healthy user growth in fiscal 2024, close to the average experienced in recent years. They are also projecting strong growth in premium subscribers. Spotify expects its operating margin and gross margin to improve in fiscal 2024. For the year, the project that broadcasting will deliver a positive gross profit. Additionally, they project that Free Cash Flow generation will exceed that generated in 2023 by a meaningful margin. 

Spotify’s Stock (SPOT) Surges On Strong Outlook

Spotify’s stock saw significant gains on Tuesday, February 5, 2024, on the solid guidance in its earnings report. Additionally, the strong subscriber growth and MAUs growth helped boost confidence in the stock despite missing analysts’ earnings estimates.

In the early morning session, SPOT stock reached $240.02, a 7.39% single-day gain. It closed trading 3.88% higher at $231.92 per share.  

Over the past 52 weeks, Spotify shares have peaked at $248.67 and bottomed out at $114.64. The share price has risen by 84.97% in the past 12 months, driving substantial value creation for shareholders. Year-to-date, the stock is up 22.84%. Spotify now boasts a sizable market valuation of $45.257 billion. 

Spotify (NYSE: $SPOT)

Analysts Largely Bullish on Stock 

Wall Street analysts are optimistic about Spotify’s prospects, giving it an overall rating of a moderate buy. Their average price target is $242.06, a 4.37% upside. Among analysts covering the stock, 14 rates it a Buy, 4 have it as a Hold, and just one recommends Selling. With continued solid user base growth expected and potential profitability improvement on the horizon, analysts generally see Spotify’s risk-reward profile as attractive at current levels for long-term investors. 

Final Thoughts  

Spotify’s latest quarterly results highlighted its ability to expand its massive user base. While headwinds on financial performance remain in the near term, Spotify is well-positioned to leverage its large user base to drive enhanced monetization. Assuming the successful execution of planned initiatives around pricing and costs, analysts see a meaningful upside for the stock over the next 12 months. Investors with a tolerance for variability in earnings should consider building a position. 

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