Spotify (NASDAQ:SPOT), the music subscription service based in Stockholm, Sweden, is hanging in against big competitors, but still losing money and upsetting the talent. This has helped grow concerns for some Spotify stock owners … but are these worries truly justified?
The company’s March earnings report showed a net loss of $158 million, 88 cents per share, on revenue of $1.68 billion. (Results are reported in Euros, translated at $1.12 to the Euro for this story.) Revenues were slightly higher than the previous quarter; gross profits were slightly lower.
What management emphasized was a 26% gain, year-over-year, in monthly users, to 217 million. More of those users are also paying for the service, with premium revenue up 34% YOY, and ad revenue flat. The company hopes it can end free streaming in three years.
In response, Spotify stock rose 4.7% in pre-market trading, after gaining 4% on April 26. It opened at about $137 per share on April 29, giving it a market cap of about $24.8 billion, almost four times annual revenue. But it has since come back down to earth after the hype died down.
Cash Flow Machine
Bulls are calling Spotify a “cash flow machine” whose artificial intelligence figures out what people want to listen to, beating competitors like Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) without promotions.
Consumers seem to prefer the Spotify system to those of larger rivals, which sort music mainly by artist, type and popularity. Spotify is doing with music what Facebook (NASDAQ:FB) is doing with news and Netflix (NASDAQ:NFLX) is doing with video, narrowing tastes and giving people what they show they want.
Some 36% of Spotify users are in Europe, 29% are in North America and 22% are in Latin America. This means there is still plenty of growth available in Asia. Operating cash flow for the quarter came to $233 million, against less than $94 million a year ago.
Spotify Stock and the Competition
In its report to shareholders, Spotify called voice interfaces “a critical area of growth” for music and podcasts. All the major home speaker companies also have their own music services.
Spotify is most aggressive regarding Apple. It has filed an antitrust complaint in the European Union against Apple’s 30% take on apps, which it calls an “Apple tax.” CEO Daniel Ek noted that services like Uber and Deliveroo don’t pay the tax, but going around Apple would lock it out of Siri, the HomePod speaker and the Apple Watch.
Spotify has a more comfortable relationship with Google Home and the Amazon Alexa speaker works with Spotify Premium accounts.
Like all streamers, Spotify must also work with artists who provide its raw material. The Recording Industry Association of America (RIAA) notes that its revenue grew by double-digit rates for the third year in a row last year, with streaming revenue up 30%. Artists and their labels are getting 68% of that, against 32% for the streamers, but the artists themselves are only getting about 25% of the labels’ streaming revenue.
The bottom line here is that of $1.68 billion that went to Spotify during the last quarter, maybe just $285 million (25% of the 68% that went to the industry) went to artists. The split of that money between artists and songwriters is also an issue, and here again, the talent feels shortchanged.
The Bottom Line on SPOT Stock
Spotify is trying to sell itself as more artist-friendly than its competitors, but it’s as focused on its own self-interest as any producer who stole an artist’s future on a recording contract.
Streamers now sit on top of the music ecosystem. While it’s good to be the king, there’s also a responsibility that must be met before Spotify can become profitable.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN and AAPL.