Spotify’s earnings day is almost here. MavenFlix highlights three important metrics to pay attention to when the company delivers third quarter results.
On October 27, Spotify ( SPOT ) – Get Spotify Technology SA Report will present its third quarter results. Investors have been patiently awaiting the report to glance at key operating metrics and assess if Spotify’s growth story remains on track and supportive of the stock’s valuations.
SPOT has been struggling since the beginning of the year, accumulating losses of nearly 30%. Today, we try to understand what could happen on earnings day to change the direction of the stock at last. ( Read more from MavenFlix: Disney Stock: Wall Street Is Cautious, Should Investors Worry? ) Monthly active users
In 2020, Spotify experienced rapid increase in net additions of monthly active users (MAU). At the start of last year, ahead of the pandemic, the platform had around 271 million users. It ended the most recent quarter with a count of more than 345 million, for an increase of almost 30%.
However, the growth pace has been slowing down in 2021. With the decline in COVID-19 cases and a definitive yet spotty “return to normal”, Spotify has seen its user base size converge to more reasonable levels, without pandemic-driven spikes in the number of listeners. Spotify ended last year with 345 million users, and the number increased to around 365 million by the end of the second quarter 2021 – only 6% higher. Compare this figure to the 10% growth in MAU seen between the fourth quarter 2019 and the second period of last year. Therefore, some investors fear that further deterioration in this metric in Q3 could negatively impact SPOT’s valuation. Should it happen, however, Spotify would not be alone: many other companies whose user base ballooned during the pandemic have experienced a slowdown in growth during 2021. Margins
Another key topic of conversation for SPOT investors is margins. Spotify has achieved gross margin of around 26%, and the number has been hovering around these levels in recent years. However, some claim that the diversification of the audience and, especially, the leveraging of the platform’s content should increase profitability.
On the latter point, even though a large portion of Spotify’s costs are variable and revolve around royalties, many costs are also fixed. As the user base grows, total variable costs should represent a smaller part of the company’s sales.
An increase in Spotify’s margins in the upcoming earnings report could be early signs that the operating leverage phenomenon is, in fact, taking shape. Should this be the case, earnings expectations could increase and boost investor sentiment. Podcast Revenues
Spotify is more than a streaming music service, but an audio content platform instead. The company has been investing heavily in podcasts, and many analysts believe that it will be one of the main drivers of revenues and profits in the coming years.
In the last quarter, podcast revenue increased by almost 630%. Much of the revenue growth can be credited to user count rising from a low base. However, when the company is better able to apply the advertising model to podcasts, revenues from this segment could represent a significant chunk of the company’s P&L performance.
Podcast is also relevant to the previous topic, margins. The management team explained last time that a heavier revenue mix towards podcasts should be positive for profitability since the investment in the platform can be better leveraged. Therefore, investors might want to pay close attention to the early-days performance of this nascent business.
( Read more from MavenFlix: Netflix Stock: Key Takeaways from Third Quarter Earnings ) Our View
Spotify has good growth prospects, which is the good news. The bad news is that quarterly results that do not reinforce the growth narrative can put a damper on valuations and share price.
Therefore, the next few days should be all about whether Spotify can deliver against valuations that, despite YTD stock price weakness, are still far from being a bargain: 47 times 2025 earnings per share projections. Twitter speaks
Spotify reports Q3 earnings on October 27, and the stock has been down a painful 27% so far this year. What do you think happens to share price after earnings? Is the price right?
Looking at a company’s business fundamentals is only half the work needed to find a good stock. How much one pays to own the shares is a key factor in the success of any investment. This is why valuation analysis is so important.
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