Spotify Technology: Profitability Concerns Remain

Spotify Technology (SPAT) is the largest provider of music streaming services worldwide, with more than 406 million active users per month (MAU). Of these, 180 million are active premium subscribers.

Occupying a prominent position in a growing market, Spotify showcases some exceptional features, such as a predictable way to increase revenue ahead.

However, I can’t overcome the fact that the company’s low return on net income worsens the stock’s investment business. Spotify’s profitability prospects remain too weak, despite steady revenue growth. Thus, there is considerable uncertainty regarding Spotify’s ability to generate high future shareholder returns.

Shares of Spotify have adjusted significantly from 52-week highs of ~ $ 387. However, there may still be more opportunities for stock declines given the overall risks and lack of steady earnings growth ahead. Accordingly, I am neutral about stocks.

The subscriber base is growing

Spotify’s triumph over other analogues in music broadcasting was based on its availability and access on multiple platforms. In my opinion, the fact that Spotify can be obtained from almost any device and operating system is the most significant catalyst for the growth of the platform.

I’m also interested in a broadcast with support for Spotify advertising, which has helped the platform attract potential future subscribers by familiarizing them with the product before they have to spend a dime.

As such, MAU platforms are very consistently expanding from quarter to quarter. As new MAUs spread through Spotify’s ad-supported business model, the subscriber base will gradually expand further. This was once again demonstrated by the latest results of the campaign. However, is the growth rate good enough?

In the 4th quarter, Spotify reported a 16% increase in premium subscribers to 180 million. That means a slowdown from 19% last quarter and probably confirms my concern that the company is approaching the repayment phase.

The company noted that Spotify was protesting a shortened holiday advertising campaign for its Standard plan, which rejected the typical seasonality of gross consumption. Given this, the growth of premium subscribers could have slowed even further, with the exception of this action, which is even more worrying.

On the one hand, I appreciate the fact that Spotify subscribers are very unlikely to switch to other platforms, because once they get acquainted with the platform, including creating playlists and sharing music with friends, changing the platform will be quite annoying.

On the other hand, if Spotify’s potential to sustain forward-growing revenue growth is to rapidly increase its subscriber base, things may not look so good starting in the 4th quarter.

Margins remain inadequate

Despite Spotify’s high-quality predictability of cash flow, the company’s outcome remains very elusive. In the 4th quarter, Spotify’s gross profit was 26.5%, consistently declining from 26.7%.

COGS mainly include royalties paid to the artist / record label. Thus, gross profit is sure to remain compressed. Of the € 712 million in gross profit, € 253 million was spent on research and development, € 340 million on marketing and € 126 million on administrative costs. They amount to 719 million euros, which exceeds gross profit.

Thus, not only is it uncertain when and when a company will receive a net GAAP profit, but it is also difficult to say whether the company will ever be able to publish a reliable operating profit.

In any case, investors should not expect dividends any time soon.

Wall Street

Turning to Wall Street, Spotify Technology has a consensus rating of moderate purchases based on 15 purchases, six holdings and one sale assigned over the past three months. At $ 247.81, Spotify’s average price target assumes a growth potential of 62.7% over the next 12 months.


While Spotify has some attractive features from an investor’s point of view, there doesn’t seem to be a clear roadmap for making a steady profit – at least in the short term. For this reason, it is quite uncertain whether the company will be able to sustainably create value for shareholders in the future. I remain neutral to Spotify Technologies.

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