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Spotify Shares Sink After Earnings And Outlook Disappoints

Spotify (NYSE: SPOT) topped Wall Street’s estimates for paid subscribers and total user growth in its fourth-quarter report on Wednesday. However, the company’s earnings and outlook disappointed investors, causing the stock to fall as much as 8% in trading on Wednesday. 

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Spotify fourth-quarter earnings

The Swedish-based company recorded a loss of $0.79 per share on sales of $2.58 billion in Q4 versus an expected loss of $0.69 per share on sales of $2.61 billion. 

However, Spotify did add 11 million new paying subscribers in the quarter, bringing it to a total of 155 million premium users globally. This surge smashed analyst expectations of just 9 million new subscriber additions. Despite this growth, average revenue per user fell by 8% to $5.13 year-over-year (YoY). Spotify attributed this to discounted plans and the lower prices it charges in Russia and India. 

Total monthly users also rose 27% to 345 million. The company’s ad-supported business is very important as Spotify has proven that it can convert more than 40% of these users to paid subscribers over time, making it an important indicator of future paid user growth. 

Overall, the media service provider posted a loss of $149 million, down from the $250 million loss it made in 2019. Investors won’t be surprised to see Spotify record losses though as it is still pre-profit and is continuing to invest in growth opportunities. 

 

Spotify’s 2021 forecast

Shareholders were less than impressed with Spotify’s forecast of $63.6 million in losses on sales of $2.51 billion in the first quarter of 2021. For the full year, Spotify forecasts losing $300 million on revenue of $11.06 billion. The company may be expecting to lose money but it is spending that money on targeting 1.5 million new subscribers and hopes monthly active users to jump to 359 million.  

Investors expressed disappointment in the company’s 23.7% to 25.7% 2021 gross profit margin (GPM) forecast too, which calls for no improvement on Q4 2020’s GPM of 26.5%. 

 

Spotify’s gamble on audiobooks and podcasts 

Spotify bet big on investments outside of music in 2020. The company’s recent move into audiobooks, by experimenting with recordings of celebrities reading books like Frankenstein, has proven very popular, while it is also becoming the leading name in podcasts. During the December quarter, the company signed big names including Prince Harry and Meghan Markle, and Ava Duvernay. The app now offers 2.2 million podcasts through its channels with consumption up almost 100% YoY. 

Spotify reiterated the importance of podcasts in yesterday’s earnings call by stating that the segment boosts usage, engagement, and retention within the product. However, some investors have noted that they have not seen these investments translate into higher levels of app downloads or premium subscriptions. Rumors have circulated that the company is considering offering a separate podcast subscription service which would bring in more revenue to combat this problem. 

 

Should Spotify investors be worried? 

While shareholders may be disappointed with the report from an earnings standpoint, it should be highlighted that Spotify’s success in growing its users and subscribers should be the main focus here. As Spotify is still in a start-up, pre-profit stage it’s not unusual for these companies to post continued losses. The vital thing is that Spotify is reducing losses every quarter whilst still investing in new opportunities to stay ahead in this competitive market.

 

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