Spotify Technology S.A. (SPOT) changed the music industry forever. Spotify has remained the streaming music powerhouse despite competition from Apple, Amazon, and Alphabet, closing last quarter with 615 million monthly active users, up 19% YoY.
Spotify’s newfound commitment to efficiency and profits, mixed with a string of price hikes are leading to soaring earnings growth. SPOT is also set to double its revenue between 2020 and 2025.
Spotify shares have soared roughly 300% off their 2022 lows. Yet, the recent big-tech pullback has Spotify trading 20% below its all-time highs, with enticing valuation levels.
Spotify’s Bullish Basics
Spotify kickstarted the paid streaming music industry in 2008. The firm was the vanguard of paid streaming, reshaping the music industry as much as Netflix forever altered TV and movies. Spotify is thriving despite streaming music competition from Apple (AAPL), Amazon (AMZN), and Alphabet (GOOGL), as users flock to the service for music, podcasts, and more recently, audiobooks.
SPOT nearly doubled its revenue between 2019 and 2023. Spotify grew its monthly active users by 19% YoY in the first quarter of 2024 to 615 million across 184 markets, expanding its paid Premium Subscribers by 14% to 239 million. Spotify grew its Premium Subscribers by 84% between Q1 FY20 and Q1 FY24, while monthly active users surged 115%.
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Spotify in the summer of 2023 raised its monthly prices for its ad-free Premium plans to match competitors such as Apple and Amazon. The streaming music firm announced in June 2024 another price hike to help keep up with inflation and boost profits. Spotify raised the price for its individual Premium subscriptions by a dollar to $11.99 a month, while Duo plans climbed by $2 to $16.99 a month. Meanwhile, family plans were hiked by $3 to $19.99 a month.
Spotify is focused on efficiency, having trimmed its workforce among other efforts. The company boosted its ad-supported gross margin to 6% last quarter vs. -3% in the year-ago period, as revenue growth outpaced rising content costs. Premium gross margin climbed to 30% vs. 29%, primarily driven by sales growth outpacing music royalty costs.
Looking ahead, some Wall Street analysts project Spotify will grow its total user base by almost 50% by 2028 to 900 million. Spotify’s user growth expansion is key to helping it continue to negotiate favorable rights deals with artists.
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Growth Outlook
Spotify grew its revenue by 21% last quarter and swung from an adjusted loss of -$1.24 a share to +$1.05, crushing our bottom line estimate. The company is now firmly committed to profits amid the new interest rate environment, alongside the likes of Amazon.
SPOT’s adjusted earnings outlook has skyrocketed over the past 12 months, up 723% for FY24 and 215% for FY25. The streaming music firm’s upbeat EPS outlook helps it land its Zacks Rank #1 (Strong Buy). Spotify’s most accurate/recent EPS estimates came in slightly below consensus, but SPOT stock's recent pullback will help account for that.
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Zacks estimates call for SPOT to grow its sales by 18% in 2024 and another 15% next year to soar from around $14 billion in FY23 to nearly $20 billion next year—doubling revenue between FY20 and FY25.
Spotify is projected to swing from an adjusted loss of -$2.95 a share last year to +$5.02 per share in 2024 and then surge another 44% next year. The earnings expansion is driving the stock, with Wall Street convinced that Spotify has reached an inflection point on profits.
Performance, Technical Levels, and Valuation
Spotify stock has climbed around 100% since its 2018 IPO, lagging the Zacks Tech sector’s 190% run. But Spotify shares have soared roughly 300% off their 2022 lows (around the stock market’s 2022 bottom), including a 55% YTD climb, blowing away Apple, Amazon, and Alphabet during those stretches.
SPOT has faced some selling pressure recently, alongside plenty of other first-half big tech winners. Spotify is down around 11% from its early June highs, putting it 20% off its 2021 peaks.
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Spotify is trading below its 21-day and 50-day moving averages and at some of its most oversold RSI levels over the last five years. Any pullback to SPOT’s 200-day moving average (around $240 per share) would mark a screaming buy opportunity.
Spotify is trading at 48.1X forward 12-month earnings, which is hardly cheap. But it has traded as high as 175X earnings over the last year. SPOT’s PEG ratio, which factors in its long-term EPS growth outlook, comes in at 0.6, offering a 67% discount to the Tech sector.
Bottom Line
Spotify’s recent downturn could set up SPOT stock for a potential break out in the coming weeks, especially if it impresses Wall Street with strong guidance on Tuesday, July 23.
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