Spotify’s Earnings Weren’t Great, But SPOT Stock Is Still a Winner

Advertisement

Music streaming giant Spotify (NYSE:SPOT) reported sub-par fourth-quarter numbers this week that also included a tepid 2021 guide. Wall Street’s response to the print sent SPOT stock spiraling about 10%.

Spotify (SPOT) logo is on the screen of a smartphone with headphones plugged in.

Source: Kaspars Grinvalds / Shutterstock.com

While Spotify’s earnings were not good, the big picture on Spotify remains very positive.

That is, this company continues to do everything right to position itself to dominate the music streaming landscape at scale, and eventually turn into the unrivaled “Netflix of Music.”

This includes integrating with every major audio hardware product in the world, building out a robust portfolio of compelling original podcasts, launching a two-sided marketplace to incentivize artists to stick with the Spotify ecosystem and leveraging promotional pricing schemes to landgrab market share in emerging global markets.

Sure, the economics today aren’t pretty. Neither were Netflix’s economics five years ago. But scale fixed Netflix’s economics, and now the company has a ton of users and is enormously profitable. Same will be true with Spotify.

So, ignore the weak earnings print, and buy the dip in SPOT stock. But do so only once technical support shows up.

Here’s a deeper look.

SPOT Stock: Weak Q4 Earnings & Weaker Guide

Spotify’s fourth quarter earnings report was not very good.

There were some positives. The company added a record 25 million monthly active users in the quarter. Premium subs rose 24% year-over-year. Ad-supported MAUs rose 30%. Gross margins expanded by 90 basis points.

But, the same negatives keep showing up in these earnings reports. That is, monthly average revenue per premium subscriber dropped 8% year-over-year, weighed by promotional plans such as Family, Duo, and Mini. This caused what was 27% MAU growth in the quarter, to produce “just” 17% revenue growth.

Meanwhile, Spotify is having to spend an arm and a leg on content, product, and marketing to sustain its big user growth trajectory. The opex rate in Q4 was 27% — virtually the same as it was in the year ago quarter, despite 17% revenue growth. In other words, Spotify has yet to benefit from economies of scale and drive meaningfully positive operating leverage.

Worse yet, the guide was weak. Spotify management broadly believes that the pandemic pulled forward demand and is therefore guiding for a material slowdown in subscriber growth in Q4, without much expansion in profit margins.

All in all, it simply wasn’t a very good earnings report from Spotify. It makes sense that SPOT stock traded down on the news.

Big Picture Remains Positive

Zooming out, the big picture here remains positive, and Spotify is doing everything right to fix its near-term headwinds over the next few years.

Specifically, Spotify continues to build out a very robust portfolio of compelling original podcasts. The company now has 2.2 million podcasts on its platform (up from 1.9 million last quarter), and 25% of its MAUs are engaging with that podcast content. The bigger (and better) this portfolio of original content, the more likely Spotify is to differentiate itself from other music streaming platforms, and win new subscribers (while retaining old ones, too).

Spotify is also integrating with every audio hardware product in the world. In the quarter, the company launched increased podcast support on connected Google and Alexa devices, and integrated with PlayStation 5 and Xbox Series X/S gaming consoles. Anywhere you can play music, the Spotify app is there.

Plus, Spotify continues to grow out its two-sided marketplace to attract artists to sponsor, promote, and publish their content on the Spotify app, while also leveraging innovative, discount pricing schemes to gain users in emerging markets (like Mini in India).

Overall, Spotify is doing everything right. Long-term, this company projects as the ubiquitously dominant music streaming platform. It really is the Netflix of Music in the making.

And, as the Netflix of Music in the making, Spotify will soon benefit from economies of scales which will fix all of its near-term economic headwinds.

Big Upside Potential

Spotify has two big problems today: Falling average revenue per user, and sluggish margins.

Both problems will be fixed in the near future.

The more content Spotify acquires, the more differentiated and valuable its platform will be to the consumer. Soon enough, price won’t be the reason why consumers choose Spotify — quality and content will be. At that point, Spotify will stop leaning so heavily into promotional pricing plans to drive subscriber growth, and instead actually lean into price hikes (much like Netflix). Thus, long-term, ARPU will reverse course and trend higher.

As that happens, Spotify’s margins will move higher, too. That’s because: 1) price hikes are 100% margin additive, and 2) increased scale will drive positive operating leverage since the majority of Spotify’s content costs are fixed.

In other words, Spotify truly is following in Netflix’s footsteps.

Build a great platform by spending a ton of money on the platform, user acquisition, and content. Create a super sticky ecosystem that subscribers won’t leave, even if you hike prices. Hike prices. Let economies of scale kick in. Watch profits start to soar.

Accordingly, the long-term outlook on SPOT stock remains very positive.

Bottom Line on SPOT Stock

I understand why SPOT stock is falling after its earnings report. The numbers weren’t very good, and broadly underscored that this company has some big economic challenges.

But Spotify’s innovation today puts it in a position of strength to solve those economic challenges in the near future.

Thus, near-term weakness in SPOT stock is nothing more than a long-term opportunity. This really is the Netflix of music.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.

The New Daily 10X Stock Report: Dozens of triple-digit winners, peak gains as high as 926%… 1,326%… and 1,392%. InvestorPlace’s bold new initiative delivers one breakthrough stock recommendation every trading day, targeting gains of 5X… 10X… even 15X and beyond. Now, for a limited time, you can get in for just $19. Click here to find out how.

In addition, you can sign up for Luke’s free Hypergrowth Investing newsletter. Click here to sign up now.


Article printed from InvestorPlace Media, https://investorplace.com/hypergrowthinvesting/2021/02/spotifys-earnings-werent-great-but-spot-stock-is-still-a-winner/.

©2024 InvestorPlace Media, LLC