Spotify (NYSE: SPOT) released a mixed set of second-quarter results last week. The company beat on revenue but missed on EPS and the key subscriber growth metric. The stock price initially sold off but quickly recovered before being caught up in the market selloff on Friday.
Second-quarter revenue came in at $1.85 billion, ahead of forecasts and up 24% for the year. The quarterly loss per share was $0.47, $0.12 lower than expected. This was, however, a vast improvement on the $2.57 loss per share a year ago.
Growth on Track
Monthly active users (MAUs) were 232 million which was up 29% for the year. Premium subscribers grew to 108 million which was up 8 million but fell short of the company’s 8.5 million forecast. Nevertheless, this does represent robust year-on-year growth of 31%.
The company also saw strong demand for its Spotify Lite, a scaled-down version that is now available in 36 developing countries. Spotify’s podcast audience grew 50% which is encouraging given that this is an area the company is focusing on.
For Now Spotify Remains The Market Leader
Spotify does have a lot going for it. It is arguably the market leader, it’s turning a profit, and it isn’t trading on a ridiculous valuation. If the company manages annual earnings growth of 28% over the next few years, as analysts expect, then the current price is reasonable. The platform is also sticky – when customers leave, they can’t take their playlists and listening preferences with them. In the last quarter, the platform experienced its lowest churn rate today, proving that customer loyalty is improving.
The growth in Spotify’s podcast audience is also promising. This is an area that no single platform, except to an extent Apple, has managed to dominate. No platform has managed to monetize podcast content effectively either. If Spotify can get this right, it will add an additional revenue segment to the business.
When the company listed in April last year, it was one of the first ‘sharing economy’ platforms available to investors. That fact along with the success of Netflix led to an immediate bubble in the stock price. After falling 50%, the price has now recovered to just below its IPO price. Sell-side price targets have been falling ever since the listing, though they do appear to be bottoming out now. This means expectations are now more realistic and the less committed holders are already out of the stock.
For now, Spotify’s prospects look solid, but investors do need to manage expectations. While the business doesn’t carry the risks that many other loss-making tech companies do, the company is also not likely to grow rapidly from here on out.
In the longer term, the risks will come from the competitive landscape. Music streaming is becoming very competitive. Apple, Amazon, Google, and others like Soundcloud all have very successful music streaming platforms. In addition, China’s music streaming giants like Tencent Music have their eyes set on global expansion.
Three of Spotify’s largest competitors – Amazon, Google, and Apple – have very deep pockets with which to fight for market share. This week Amazon announced that student members of its Prime program would be able to stream music for just $0.99 a month.
Spotify is likely to face similar pricing strategies from competitors in the future. Investors will need to keep a close eye on these competitors, and whether or not they gain traction.