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Will Spotify ever turn a profit?

Spotify’s share price surged after Q4 earnings revealed strong audience growth. However, its losses widened, and investors will be waiting to see if its stock fully recovers from 2022’s substantial falls. The streaming giant has never turned a profit, despite criticisms it doesn’t pay artists enough.

- Spotify shares surge 12.7% in one day following news of strong audience growth.

- Streaming sector struggling to make profits, despite predictions of market expansion.

- Spotify is the top holding in the ProShares On-Demand ETF.

The Spotify [SPOT] share price spiked 12.7% to its closing price on Tuesday after the company reported its fourth quarter (Q4) 2022 earnings. The Swedish audio streaming service posted healthy listener growth and beat expectations on gross margins but suffered wider-than-predicted losses.

It also narrowly missed on revenues, posting €3.2bn, which is up 18% year-over-year, but 0.3% shy of the €3.18bn anticipated by a consensus of Wall Street analysts compiled by Bloomberg.

Spotify also announced losses of €1.40 per share, in excess of the predicted losses of €1.30. Total operating losses for the quarter came in at €231m.

In more upbeat news, Spotify’s monthly active users exceeded forecasts, reaching 489 million, 11 million more than expected and rising 20% year-over-year. Its share price closed at $112.72, up 12.7%, its highest point since 22 August.

Investors will hope Spotify’s stock regains what it lost in 2022 when shares tumbled by more than two-thirds in value. The company’s share price is down 44.6% in the past year but up 42.8% so far in 2023.

Spotify attributed its Q4 losses to increased costs related to staff hired during the pandemic, as well as higher advertising costs and currency movements.

It has already moved to address the first of these issues, last week announcing it was laying off 6% of its 10,000 employees. Of the cuts, CEO Daniel Ek said: “I was too ambitious in investing ahead of our revenue growth”.

Subscriber growth lends hope

Audience growth was a bright spot in an otherwise gloomy panorama.

During Q4, Spotify’s paid subscriber base increased by 10 million to reach a total of 205 million listeners, up 14% year-over-year. Its free, ad-supported listeners grew 25% to hit 295 million.

Spotify expects its subscribers to grow to 500 million during Q1, beating analyst estimates of 492.2 million.

The company said ad-supported revenue growth jumped 14% from the equivalent period in 2021, led by podcasting, and added that its gross margin exceeded guidance by 80 bps, which it pinned to “lower investment spending and broad-based music favourability”.

Spotify anticipates its operating losses will be €194m in Q1 2023, with up to €45m of this attributable to severance payments and €19m to foreign exchange rates. 

Nevertheless, on the earnings call, Spotify’s CFO Paul Vogel said he expected the company’s gross margin to improve during 2023.

Analysts at Wells Fargo commented that Spotify’s subscriber numbers have provided "the green shoots bulls want”, while the consensus among 33 analysts at CNN Business is currently to ‘hold’ Spotify stock.

Streaming struggles to cash in

The overarching challenge for streaming services remains how to turn a profit. Spotify is perhaps the best-known name among rivals, including Apple Music [APPL]. Despite its popularity with music fans, however, Spotify has not made a full-year net profit since being founded in 2006. The company was listed on the New York Stock Exchange in 2018.

Podcasting was one potential area of growth in which Spotify invested heavily, paying big fees to stars like Joe Rogan and Alex Cooper.

But this has yet to pay off. In January, Will Page, former chief economist at Spotify, said podcasts were “a sea of niches”, unlike “every other media model in the world where you’ve traditionally had a small handful of blockbusters that dominate demand”.

In addition, many artists argue they are not paid enough. Spotify gives around 70% of revenues to music rights owners, such as labels or distributors, who pass proceeds on.

Despite ongoing challenges, Grand View Research projects the global music streaming sector will grow at a CAGR of 14.7% to 2030, from $29.45bn in 2021.

Funds in focus: ProShares On-Demand ETF

Investors seeking exposure to Spotify shares could look at the ProShares On-Demand ETF [OND]: it is the fund’s top holding at 5.76% of assets under management (AUM) as of 31 January. In 2023 so far, OND is up by 13.1% and down 25.6% over the past 12 months.

Spotify is the seventh-biggest holding of the Global X Social Media ETF [SOCL], with 5.25% of AUM as of 31 January. SOCL is up by 18% so far this year and down 27% over the past 12 months.

Other funds offering investors exposure to Spotify shares include the SoFi Be Your Own Boss ETF [BYOB], where the company is the second-largest holding and accounts for 4.53% of AUM as of 31 January. BYOB is up by 23.6% so far this year and down 37.3% over the past 12 months.

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