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Spotify: It's Premium User Growth & Nothing Else, For Now

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Shares of Spotify SPOT surged to a new all-time high Thursday after the company reported its Q2 financial results. The streaming music service topped some of its own user growth projections, but Spotify faces more competition than ever, which includes tech powers Apple AAPL and Amazon AMZN .

Q2 Overview

Spotify initially saw its stock price sink following its earnings release Thursday morning, only to see its shares climb over 4% to hit a new high of $198.99 per share. The company's total quarterly revenues jump by 26% from a year earlier to 1.27 billion euros or roughly $1.49 billion, which just missed our $1.51 billion Zacks Consensus Estimate. But investors shouldn't focus too much on a small top-line miss

The company also reported an operating loss of 90 million euros or approximately 7% of total quarterly revenues. The company's gross margin of 25.8% came in near the high end of its guidance range. But the star of the report was the company's user growth, which will likely remain a Wall Street focus for some time.

User Growth

Spotify's Monthly Active User base surged 30% from the year-ago period to 180 million, with Latin America and its "Rest of World" region contributing more heavily to this growth than its more established markets such as the U.S.-which contributes to roughly 31% of the company's worldwide revenue-or Europe. The company's ad-supported MAUs popped by 23% to close the quarter at 101 million.

The streaming giant's premium subscribers soared 40% to close the quarter at 83 million, which also marked a 10% sequential surge from Q1's 75 million paid customers. And premium subscribers are the all-important figures because these users accounted for 90% of Spotify's total quarterly revenues, just as they did last quarter. Spotify's premium revenues climbed 27% to hit 1.15 billion euros.

Outlook

Looking ahead, Spotify expects its MAU total to climb to between 188 million and 193 million in the third quarter, which would represent a growth range between 25% and 29%. More importantly, total premium subscribers are projected to surge by 36% to 43% to reach between 85 million and 88 million.

The company projects it will close fiscal 2018 with between 199 million and 207 million total Monthly Active Users, which would mark 30% expansion on the high side. On top of that, Spotify expects to see its premium subscriber base climb by as much as 37% to end the year with anywhere between 93 million and 97 million users.

Another good sign for Spotify, on top of these strong user growth figures, is that the company was able to lower its U.S. customer churn , or service cancellations, to 4%. The company's worldwide churn rate was 5.1% at the end of 2017. SPOT noted that its lower churn was based on growth in family usage, student packages, as well as its Hulu bundle service.

Industry Worries?

Spotify made some headlines in the lead up to its second-quarter earnings release not based on its own positive momentum. Instead, reports indicated that Apple Music claims roughly 21.5 million subscribers in the U.S., which came in just behind Spotify's 22.5 million at the time. The same report went on to project that Apple will match Spotify's U.S. subscriber base by August.

Apple last reported only 38 million total Apple Music subscribers-though it noted the service has 50 million users including people on a free trial. Therefore, Spotify is still by far the most dominant player in the streaming music industry. The worry here is that Apple Music launched in June 2015, while Daniel Ek founded Spotify in Stockholm in 2006.

The company also faces competition from Amazon's Music Unlimited and Google's GOOGL new YouTube Music. Investors should remember that Spotify operates a relatively low margin business because it owes so much in royalty fees, which is an issue that it needs to address eventually.

Bottom Line

The point here is that unlike Netflix NFLX , which is able to produce its own content, Spotify might never become its own record label. This means that down the road when its user growth stops climbing by 40%, inventors will want more. At the same time, its tech giant competitors can continue to throw money at music rights fees, with almost no impact on their bottom lines.

It is worth noting that Spotify's ad-supported option is something that Apple does not offer, and is one of its best tools to attract people to its all-important paid tier. "You may ask why give this away for free?" Chief R&D Officer Gustav Söderström said at a Spotify event earlier this year. "We know that it's the only way we're going to achieve our goal of getting billions of fans on the plan."

The Hottest Tech Mega-Trend of All

Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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