Audio streaming company Spotify [SPOT] is expected to post disproportionate growth in net profit to its revenue when it reports its third quarter results on 27 October. Revenue is expected to rise 26%, while profits are seen growing 63% year on year.
Sales continue to be supported by the rise in popularity of podcasts, such as The Joe Rogan Experience, and more people using services while being at home during the coronavirus pandemic.
However, sentiment towards Spotify’s share price has been weak since the start of 2021 as investors fear consumption will decrease as outdoor activities resume. Since the start of 2021 the Spotify share price fallen 18%.
"We've analysed MAU (monthly active user) growth from smartphone penetration and think that consensus remains too optimistic,” said Wells Fargo analyst Steven Cahall. The company may be able to ramp up advertising but not adequately, Cahall added.
Spotify’s monthly active users growth has slowed and the company is hurting from the threat of regulation and intense competition from rivals, including Amazon [AMZN].
Spotify CEO and founder Daniel Ek disagrees and believes the growth trend is reversing and the company’s innovation and investment will support future growth.
What to expect in Q3?
According to Zacks, Spotify is expected to post a quarterly loss of $0.25 per share. Its revenues are tipped to be $2.9billion.
In its second quarter, Spotify reported a loss of $0.19 earnings per share beating estimates of a $0.52 loss. It reported revenues of $2.81billion compared with expectations of $2.75billion.
Total monthly active users rose 22% to 365 million below its guidance of between 366 million and 373 million. It blamed the miss on pausing marketing campaigns due to the severity of the pandemic and a user sign-up problem with a global third-party platform.
$2.81billion
Spotify's revenue exceeded expectations of $2.75 billion
Premium Subscribers rose 20% year on year to 165 million in the quarter, however average revenue per user of 4.29 euros was down 3%..
“Although we continue to face near-term uncertainty with respect to COVID-19, we remain confident in the underlying health of our user funnel, and our existing user retention activity remains consistent with historical trends,” the group said.
Triggers for the Spotify stock price
The call on Spotify’s share price is mixed. Investment group Worm Capital is bullish. Spotify will “ultimately prove out to be the Google of audio,” it said in a report. “It should command a far higher multiple today.”
Credit Suisse doesn’t agree. It recently lowered its price target from $315 to $270 and Truist cut its price from $290 to $270.
Over the past 12 months, the Spotify share price has dropped 10% with peers Amazon, which runs Amazon Music up 4% and Apple [AAPL], which provides Apple Music, up 29.5%.
Investors will be looking carefully at the group’s monthly active user numbers to see if there has been an improvement. The group expects to hit MAU of between 377 and 382 million.
There will also be focus on the Competition and Markets Authority in the UK, which is set to begin a study into on-demand services. It is interested in Spotify given complaints from musicians that the streaming model squeezes their income.
According to a Times report, Andrea Coscelli, the head of the regulator, said, “Over the past decade, the music industry has evolved almost beyond recognition, with streaming now accounting for more than 80 per cent of all music listened to in this country. A market study will help us to understand these radical changes.”
Competition pressures
Spotify faces continued competition from the likes of Alphabet’s [GOOGL] YouTube Music, Apple and Amazon. That puts pressure on its need to keep innovating in order to remain differentiated.
“Spotify has a clear path to [its] goal [of 1 billion users]” - Brett Schafer in The Motley Fool
It does have its share of bum notes, but according to Brett Schafer in the Motley Fool, there are plenty of good vibes ahead. “It has set a goal of hitting 1 billion users. Given that there will be an estimated 7 billion smartphone users worldwide by 2030, Spotify has a clear path to that goal,” Schafer wrote.
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