Spotify isn’t profitable yet and hasn’t met its revenue or profit forecasts, but the company’s latest quarterly report, released Jan. 31, has reaffirmed investors’ confidence in podcasts. Shares gained 20% since then, it has climbed as high as $120 each, correcting some of the 66% drop from the stock’s all-time high at $360. This growth is mainly driven by better-than-expected user growth and guidance from CEO Daniel Ek for optimizing spend management in general and podcasts in particular.
Spotify is changing the negative bias it has been exposed to for the first time in a year. “Spotify’s business model continues to be undervalued by investors. due to low gross margins“, explains XTB analyst Darío García. This meant that Spotify was undervalued, “which is unlikely to change until the company starts to make significant operating profits.” The company has yet to make progress in increasing its gross profit. In 2022, the company made a loss of $430 million, almost 13 times the $34 million it lost in 2021.
The forecast for the first quarter of this year is that gross margins will be at their lowest point in 2023. podcasting business will weigh less on profit margins in the future. “While Spotify suggests music gross margins are increasing, it looks like this could be an accounting exception to some extent,” Garcia said. This is because their tools and services are used by record companies and included as cost offsets rather than a source of revenue. So, while it’s better to see it as a separate business with its own revenues and costs, the market business music contributes to improving gross margins.
Spotify’s main problem was betting on podcasts, a business where offerings were extremely expensive compared to what they offered. The company is reducing its costs to change the negative outlook of the markets and its strategy is working for now. They point out from XTB that one way to improve their margins and profit prospects is to reduce the amounts paid for podcasts by certain celebrities like Kim Kardashian or Meghan Markle. Now, company chose to lay off 6% of its workforceIt would mean a staff reduction of 600, but the impact would be relatively small. “Perhaps a hiring freeze and some additional reductions in headcount, like what was seen at Meta, would be necessary to drive the company toward a combination of sales and profit growth in the coming years,” García says.
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Adding to this challenge entry of competitors in streaming music. Its main competitor Apple Music’s revenue is estimated at $8 billion and 88 million paid subscribers in 2022, while Spotify reported approximately 205 million paid subscribers in the fourth quarter of 2022. regions of Latin America. “Subscriber growth clearly demonstrates that Spotify has established itself as the dominant music streaming service worldwide,” says XTB analyst.
It all depends on whether your financial model for 2022-2025 works. Chief financial officer Paul Vogel commented in his latest earnings presentation that “gross margin of 25.3% is 80 basis points above estimates, mainly due to lower podcast spending.” So if Daniel Ek’s predictions are met, the company will have to. more effort to divert spending to marketing and reduce content acquisition costs by “transforming into better user growth metrics and thus increasing profits.”