Spotify needs to keep the price hits coming

Spotify CEO Daniel Ek says the company plans to launch new music-only and audiobook-only tiers.  (Reuters)
Spotify CEO Daniel Ek says the company plans to launch new music-only and audiobook-only tiers. (Reuters)

Summary

The music streamer’s market value has surged on the belief that its money-losing days are in the past.

Wall Street has been loving Spotify’s latest tune. The music streamer will need to keep its pitch perfect in the coming year.

Spotify’s first-quarter results early Tuesday proved to be another hit with investors, sending the stock up 16% by early afternoon. That builds on a gain of 80% over the past six months, and more than a fourfold increase from when the company’s market value bottomed in late 2022. At the time Spotify was brought low by a surge in spending on efforts like exclusive, celebrity-backed podcasts that didn’t appear to move the needle on the company’s user metrics. Paid subscriber growth in 2022 was identical to the previous year.

The new Spotify is much more cognizant of both its top and bottom lines. Revenue jumped 20% year over year to 3.6 billion euros (equal to $3.84 billion), and the company projected 20% growth again for the second quarter—both of which beat Wall Street’s estimates. Operating income of 168 million euros beat analysts’ targets by 11%, and Spotify projected a record 250 million euros on that measure for the second quarter. That would equate to operating earnings of 418 million euros for the first half of this year, which is a sharp reversal from the 403 million euros the company lost in the same period last year.

“In essence, Spotify’s monetization pace is accelerating faster than even our previous expectations," wrote Jeff Wlodarczak of Pivotal Research in a note to clients Tuesday morning.

Investors are expecting more—a lot more. Analysts were projecting full-year operating income of about 819 million euros before Tuesday’s report, which would be a notable turn for a company that has turned an annual operating profit only once before in its history, and a minuscule one at that. Annual revenue growth is also expected to accelerate from the record low 13% growth reported last year.

Analysts expect at least some of that growth to come from price increases. Bloomberg reported earlier this month that Spotify is planning such a move in several key markets this year. Spotify confirmed at least part of that report on Tuesday, with Chief Executive Officer Daniel Ek telling analysts on the company’s earnings call that the company is planning to launch new music-only and audiobook-only tiers, though no timing or price details were given. In a note to clients earlier this month, Mark Mahaney of Evercore ISI estimates that a $1-a-month price increase would boost the company’s revenue next year by $1 billion, while creating a separate plan for audiobooks could “potentially alleviate some investor concerns around Audiobook monetization."

But Spotify can’t afford to ignore user growth either. The company added only 3 million paid subscribers during the first quarter—its lowest growth in two years—while monthly active users of 615 million fell a bit short of its forecast from three months ago. Ek blamed some of the weakness on a sharp slowdown in marketing, where he noted “we probably pulled back too significantly throughout 2023." Marketing costs amounted to less than 9% of Spotify’s revenue for the recent quarter after averaging 12% of revenue over the previous 12 quarters.

The company expects user growth to pick up later this year. But it will need to strike a delicate balance between attracting new users while keeping its bottom line solidly in the black and growing. Spotify’s current plans in the U.S. are now priced at parity with the music-streaming plans offered by Apple, Amazon and Google’s YouTube. Wlodarczak of Pivotal also noted the risk that Spotify’s now-proven ability to raise prices and boost its profits could compel record labels to seek higher royalties from the company. Those royalties still consume the biggest portion of the company’s revenue.

But Spotify’s growing scale is an important point of leverage with those same labels, which now rely on the company’s huge audience. Wlodarczak projects Spotify will hit monthly active users of 900 million by 2028—46% more than today. That would be an audience both Spotify and the music industry need to keep happy.

Write to Dan Gallagher at dan.gallagher@wsj.com

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