Audio streaming and media services provider Spotify (NYSE:SPOT) announced a headcount reduction on Monday. According to a press release by Sahar Elhabashi, Spotify’s Vice President, Head of Podcast Business, the cuts will impact approximately 200 people or 2% of the company’s workforce. Following the announcement, SPOT stock popped up nearly 3%, likely on improved profitability implications.
Per the corporate statement, Spotify has been expanding its partnership efforts with popular podcasters from around the world. It specifically mentioned a “tailored approach optimized for each show and creator.” However, implementing this protocol requires adaptation to “determine the optimal organization for this next chapter.”
Attempting to assuage a painful circumstance, Elhabashi stated that “[t]he company will support these individuals with generous severance packages, including extended Healthcare coverage and immediate access to outplacement support.”
Despite the broader implications associated with layoffs, SPOT stock represents one of the top performers in the price charts this year, gaining over 90% since the January opener. In the trailing one-year period, shares moved up over 40%.
Improved Profitability Implications May Help SPOT Stock
Fundamentally, the job cuts may lift SPOT stock over the long run due to improved profitability implications. As CNBC pointed out, the company spent aggressively to bolster its podcast unit in the last three years. Since 2020, the media specialist spent 493 million euros (or $526 million) on four different acquisitions in the podcast space, per a regulatory filing.
In addition, Spotify inked high-profile sponsorship deals with leading personalities like Meghan, Duchess of Sussex, and Joe Rogan. Put another way, management needs to find a way to make such deals efficient and ultimately profitable. Thus, the layoffs could help refocus the organization, facilitating positive momentum for SPOT stock.
To be sure, one of Spotify’s core financial strengths centers on its growth narrative. According to data from Gurufocus, the company’s three-year revenue growth rate per share clocks in at 15.2%, better than 65.56% of enterprises listed in the interactive media industry.
However, profitability has consistently plagued SPOT stock. For example, Spotify’s trailing-year operating margin sits at 6.66% below zero. As well, its net margin comes in at 6.51% below breakeven, likely sparking hesitation among at least some prospective investors.
Spotify Layoffs Provide Contrast to the May Jobs Report
Interestingly, the Spotify layoffs represented a rather glaring counterpoint to the May jobs report. According to InvestorPlace’s Shrey Dua, the most recent labor readout printed “shockingly good” numbers. Specifically, the U.S. economy added more than 339,000 jobs last month, translating to an unemployment rate of 3.7%.
On paper, it appears that anybody reasonably qualified and seeking work can find a job. The report also appears to cool worries about an incoming recession. However, some areas of the economy still feel pressure, posing concerns for SPOT stock and for broader stability implications.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
