The shares of audio streaming king Spotify (NYSE: SPOT) have more than doubled from their March low, and are up 145% since then as of this writing. That's great for shareholders, but what matters now is where the business -- and the stock -- will be in the future.
On Thursday morning, Spotify will release its third-quarter results, which will shed some light on three of the key factors that should drive the company's performance and its stock price going forward.
Premium subscriber growth
Spotify is the rare company that has thus far looked mostly immune to the COVID-19 recession. Just look at its Premium subscriber growth this year versus last year. Premium subscribers grew 27% in the first half of 2020 and 29% during 2019. The same is true of total monthly active users, which are up 29% in this year's first half after growing roughly 30% in each of the last three full years, respectively. So far, a COVID-19-related slowdown hasn't been detectable.
But management's guidance may suggest a Premium subscriber growth slowdown ahead. Last quarter, management's guidance called for 140 million to 144 million Premium subscribers at the end of the third quarter, with 24% to 27% year-over-year growth, and 146 million to 153 million to end 2020, with 18% to 23% year-over-year growth in the fourth quarter. If those growth rates play out, Premium subscriber growth would slow.
But management has consistently reported results near the higher end of their prior guidance. For example, Spotify ended the first quarter of this year with 130 million Premium subscribers when guidance had been for 126 million to 131 million. And it ended the second quarter with 138 million when guidance had been for 133 million to 138 million. That tendency goes back further as well.
So if past is prologue, then there's an above-average chance that Premium subscribers come in near 144 million, the high end of guidance, which would represent growth near 27%. Investors will tune in to see if that trend has continued.
Podcast advertising investments
Spotify's biggest strategic initiative over the last year or two has been its investments in podcast content and technology. It started in earnest last year when the company spent 357 million euros ($421 million at the current exchange rate) on podcasting businesses Gimlet, Anchor, and Parcast.
Soon after, Spotify spent 180 million euros ($210 million) acquiring Bill Simmons' podcast and media business The Ringer. And the big splash came in May when news broke that Spotify had signed Joe Rogan's The Joe Rogan Experience to an exclusive podcast deal reportedly worth over $100 million. There have been numerous other big-name signings as well, including Michelle Obama and Kim Kardashian West.
One of the big questions analysts will surely ask on Thursday's call is to what extent the company has seen its expanding podcast content attract incremental users and Premium subscribers to the platform. That question is particularly relevant as it relates to The Joe Rogan Experience, which is one of the most popular podcasts around, became available on Spotify's platform in September, and becomes exclusive later this year.
Another big question is: "How much is the company making on podcast advertising, how fast is it growing, and where is the company with its Streaming Ad Insertion (SAI) podcast advertising technology?" These are some of the key questions that relate to the timing and magnitude of the payoff from the company's major podcasting investments.
Investors should also be listening closely for any hints at management's expectations for future pricing power. Historically, management has heavily emphasized that Spotify is entirely focused on market share growth and that flexing its pricing power was not in the cards for the foreseeable future.
But last quarter, founder and CEO Daniel Ek somewhat uncharacteristically dropped the term "pricing power" a couple of times. For example, Ek said exclusive podcast content "enables pricing power." Later on the call, he said:
And I think the Spotify product and content mix is getting better by the day. And over time, that gives us confidence that we should have ability to be a significant player in subscription and have pricing power as well going forward.
This is important because many investors still view music or audio streaming as a commodity product with little differentiation, which would make pricing power elusive. As a result, many investors think Spotify's ability to raise its subscription prices is either far off in the future at best or suspect at worst when competitors like Apple's Apple Music offer a relatively similar service.
But Spotify shareholders are generally much more enthusiastic about the product's superiority to the competition and therefore tend to be more optimistic about the company's long-term pricing power. Investors should tune in on Thursday to find out what else management says about this topic and others.
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