While journalists were writing negative headlines about Spotify Technology (NYSE:SPOT) over its Joe Rogan saga, investors began buying the stock. Then the bottom dropped out. SPOT stock lost nearly half its value between last February and January 31.
In the succeeding days, it rose 15%. Then, after a net loss of $8 million on revenue of $3 billion for the last quarter of 2021, shares lost nearly 6% in after-hours trading, closing the day at about $192. Since then, the stock has dropped off a shear-face cliff, shedding 20% between two days of trading.
Rogan, who is a comedian and sports commentator, made his podcast a Spotify exclusive in May 2020. The contract was said to be worth over $100 million. It was part of a strategy by Spotify to dominate podcasting. This included the purchase of Gimlet Media and the Ringer.
Podcast Profits
The controversy involved Rogan feeding his audience anti-vaccination propaganda. Media reports suggested Spotify was “choosing” between musicians like Neil Young, who pulled their music off the service, and Rogan. But Spotify had no financial choice. It had to defend the podcaster to protect its business model.
Like many tech companies, Spotify has long sought growth at the expense of earnings. The loss for fiscal 2020 (which ended in September) came to $662 million, $3.53/share. A loss of 44 cents/share for the December was expected. The “whisper number,” a hoped-for loss, was 30 cents.
Despite it beating both profit numbers, investors sold the stock. Spotify had operating cash flow of nearly $300 million in 2020. It had $2.1 billion in cash and short-term investments as of September.
That speaks to the success of Spotify’s podcasting efforts. Spotify is buying podcast content rather than licensing it. The podcasts bring in listeners who are also buying Spotify’s premium music service, which costs $10-16/month. The company also offers a free, ad-supported music service.
Despite competing directly with Cloud Czars Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN) and Alphabet’s (NASDAQ:GOOG, GOOGL) YouTube Music, its focus on music and podcast strategy mean Spotify has been more than holding its own. Its second quarter 2021 market share was estimated by Midia Research at 31%, in a market of 523.9 million listeners.
Podcast Conundrum
The problem with podcasting is an ethical one. While Rogan and the service apologized, and Spotify created a “content policy,” it admits no legal responsibility to moderate podcast content. This is an argument used by Meta Platforms (NASDAQ:FB) to defend propagandists using the service to attack democracy. The difference is that Spotify owns the content it’s not moderating.
The efforts at damage control drew criticism from other Spotify podcasters, even the White House, which said “there is more that can be done” against disinformation. Young also joined other artists in complaining about poor music reproduction on Spotify.
Apple and Amazon lost no time piling on. They offered special deals to people switching services and playlists featuring Young.
The Bottom Line on SPOT Stock
The Rogan mess hit when SPOT stock was vulnerable. It highlights how cheap the stock had become.
Paying three times revenue for a company growing at 25% per year is cheap for tech investors. The assumption is that losses can be narrowed whenever the company wants at minimal risk.
But the mess also shows the risk in Spotify’s business model. The company, based in Europe, is competing directly with three American Cloud Czars, trying to navigate among content creators, their agents or publishers, and a fickle market.
Normally, a sale to one of these companies, or to a content company such as Walt Disney (NYSE:DIS) or Comcast (NASDAQ:CMCSA) might seem an obvious solution. But the European Commission would be unlikely to permit Spotify’s acquisition by foreign interests. Investors, and the company, look to be on their own.
On the date of publication, Dana Blankenhorn held long positions in AMZN, GOOGL and AAPL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack.
