Spotify is trading down 8.9% on Wednesday.
Dreamstime
Things are looking spottier at Spotify.
Spotify Technology CEO Daniel Ek has very high expectations for the company. In fact, he thinks Spotify’s (ticker: SPOT) key business lines—music, podcasting, and other paid audio—can boost revenue by five to seven times from current levels. But the company’s first-quarter earnings results don’t seem to point to that kind of growth, and investors are starting to question Spotify’s valuation.
Spotify shares are down 9%, at about $266.47, in recent trading, while the S&P 500 is up 0.1%. They’ve fallen 15% this year after rocketing 110% higher last year. Before the market opened, Spotify posted a narrower-than-expected loss but disappointing user numbers and relatively weak guidance.
Spotify’s growth in monthly active users slowed in the first quarter, and the relative weakness could persist through the rest of the year. In the second quarter Spotify expects a range of 366 million to 373 million monthly active users, compared with analysts’ expectations for 377 million, and premium subscribers of 162 million to166 million, compared with consensus estimates of 166 million.
The company lowered its expectations for monthly active users for the full year to a range of 402 million to 422 million, below prior expectations for 407million to 427 million. Spotify says its growth may have been pulled forward during the pandemic.
For its business to multiply at the rate that Spotify is hoping, it will have to add users much more quickly than it did in the first quarter, when premium subscribers grew just 2% and monthly active users rose 3% on a quarter-over-quarter basis.
Spotify hasn’t yet made an annual profit, and its 2021 losses are expected to be even larger than its 2019 losses. Analysts have continually pushed out the expected date at which it will break even. Nonetheless, the stock trades at about five times forward revenue.
Spotify has been raising prices, and the good news so far is that it doesn’t seem to be scaring customers away, executives said on the company’s conference call. Still, its profitability is also looking strained, with gross margins falling to 25.5% from 26.5% in the fourth quarter. For the full year, Spotify expects gross margins to range from 24% to 26%, a slight improvement from its prior expectations.
Spotify’s advertising revenue is growing faster than its subscriber revenue, which is problematic given that the company’s margins on subscribers are better. Its revenue per user continues to fall, as the company has been selling more lower-priced plans. And its costs for nonmusic services like podcasts are growing too, cutting into profits.
Ek is confident that Spotify will grow as the music and podcast industry accelerates. In a letter to shareholders, he cited an estimate that streaming revenue could triple to $79 billion by 2030, and predicted Spotify will take a substantial share of that growth. The number came from a report released this week by Goldman Sachs that forecasts remarkable growth in paid streaming customers—from 443 million in 2020 to 1.28 billion in 2030. By 2023, the report anticipates that paid streaming subscriptions in emerging markets will jump to 330 million from 162 million last year.
But one analyst on Spotify’s earnings call said that it appeared that new premium subscription additions “didn’t really grow year-on-year in the quarter despite opening up new markets.” Spotify Chief Financial Officer Paul Vogel said that the company doesn’t release data on gross additions, but that they were “very strong.” He added that “a lot of those new markets take a little while to ramp.”
The Goldman report also assumes that Spotify’s market share declines slightly, to 33% in 2030 from 35% today, but that its overall lead in streaming remains relatively strong. “We see Amazon, YouTube, and large regional players such as Tencent Music as the major share gainers, with Spotify holding its clear leadership position, at the expense of Apple Music and smaller services,” wrote Goldman analyst Lisa Yang.
If that future comes to be, Spotify’s valuation may not seem so overblown. But until growth metrics rebound, investors may remain skeptical.
Write to Avi Salzman at [email protected]
