1 Audio Streaming Stock To High All-time Highs?

Today, music streaming accounts for 84% of music industry revenue, and the sector is still growing. Revenue is expected to reach $30 billion by 2025, and the popular audio-streaming Europe-based platform Spotify Technology S.A. (NYSE:SPOT) is leading the way. In fact, it has grown by an astonishing 120% over the past five years, outpacing the broader-based stock market by almost a third. 

After a period of turbulence, Spotify is once again receiving a lot of investor attention and that’s in no small part due to the 157% gains year-to-date.

For context, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), which tracks the broader market is up a comparatively most 18% for the year.

It is also worth noting that Spotify is trading above its 50-day and 200-day moving averages, indicating a solid uptrend. So, will Spotify stock continue to go up, or will it see a correction over the next few months as seasonal weakness lurks in September and October?

Key Points

• Spotify leads the music streaming market with a 30.5% share and a 157% YTD stock price increase, outperforming the broader market.
• Despite strong revenue growth from premium subscribers, Spotify is still working towards consistent profitability, though recent quarters show positive signs.
• Spotify is enhancing its platform with new features and cost-cutting measures, positioning it for potential stock price gains and future growth.

Monthly User Growth Impresses 

Spotify is the go-to platform for a large number of consumers in the audio streaming market, commanding a 30.5% share of the music streaming market.

According to ChartMasters, Spotify is responsible for 60% of global hits’ audio streams while its next biggest competitor, Apple Music, has acquired just 13.7% of the market. 

Spotify has grown its annual premium subscriber count, the primary driver of its top-line revenue, each and every year since the company went public in a direct listing (rather than a conventional IPO process) in 2018. Although the annual rate of growth has tapered somewhat, it still ranks in the double digits as of last year.

The same upward trend can be seen in Spotify’s monthly active user data, which is not only growing but accelerating over the past few years.

Spotify’s ad-supported segment has also delivered strong MAU growth since it went live. Management attributes this success to consumer marketing campaigns that have resonated well, as well as further product and content enhancements. 

The only real concern for Spotify is its premium average revenue per user growth, better known as ARPU, which has yet to gain momentum. The highest ARPU year-over-year growth achieved was 5% between 2021 and 2022. In other years, ARPU has remained flat or declined.

Revenues On The Rise

Spotify investors have a lot to be positive about when it comes to the company’s financial results. To begin with, the top line is growing steadily.

Spotify depends on its premium subscribers for reliable revenue, and in 2023, premium revenue made up 87% of its top line. The ad-supported component of revenues has been matching the growth rate of the premium segment, offering some diversification in revenue streams. 

Gross profit and margin has been on the rise since 2018 too. The company’s gross profit made up more than a quarter of its revenue last year. However in a surprise to many casual investors, in spite of the platform’s popularity, Spotify has not yet achieved GAAP-based annual profitability as of last year.

In the first quarter of fiscal 2024, Spotify reported a solid start to the year. Key achievements included subscriber gains, improved monetization, and strength in profitability.

Although greater MAU variability was reported due to moderation of the company’s marketing activity, this metric still increased by 19% year-over-year to $615 million.

Spotify ended the quarter with 239 million premium customers, up 14% from the prior year’s period, which was in line with its expectations. The gain reflected a boost from its Family and Duo plans, which have attracted a lot of interest from the company’s core demographic. 

Revenue increased by 20% from the year-ago value for a total of €3.64 billion ($3.89 billion) and the growth rate was slightly better on a constant currency basis, at 21% year-over-year. One factor that contributed to this improvement was a 7% growth in its premium ARPU.

Other encouraging signs were visible in the company’s financials, such as recording positive quarterly operating and net income. This reflects an impressive turnaround from year-ago and quarter-ago values. Moreover, the operating income figure of €168 million ($179.74 million) was a record high for Spotify even though it came in below expectations.

Can Spotify Stock Hit New Highs? 

In spite of Spotify stock more than doubling year-to-date, analysts believe it has further upside to $396 per share, reaching new all-time highs.

The bottom line is that Spotify has a clear, effective strategy for staying ahead of the competition while boosting its margins. The company has focused on enhancing user engagement by launching music video services in 11 markets as of Q1 and unveiling an Audiobooks Access Tier for ad-supported music users in the United States.

Late last year, management announced that it would cut 17% of its workforce and lower marketing spend in an effort to reduce costs and boost operating income. If the execution of the cost reduction plan goes smoothly, it will likely be reflected by gains in the stock price. 

Sentiment seems to be favoring Spotify now too with 11 analysts upgrading their forecasts for the next quarter.

It should also be noted that while the price-to-earnings ratio of 132x seems exorbitant, it’s not overly bullish if net income continues to double as it has done in the recent quarter. Or in short, the PEG may suggest that Spotify is in fact much more attractively valued than a casual observation of multiples would lead investors to believe.

With profitability expected this year, Spotify isn’t a stock to bet against at this time, but a pullback sure would be nice to offer a more enticing entry point.