Spotify Stock Sale: The Truth Behind the Headlines

Spotify (PLACE -1.00%) quarterly reports are a prime example of why investors should dig deeper into comprehensive company releases rather than just focusing on drastic headlines. Indeed, this company is one that I intentionally stay off the news on earnings days so that I can watch the results and make my own assessment before reading what the rest of the market thinks.

In the first quarter of 2022, I was looking for consistent and continued growth in Spotify’s music and subscription business, stronger growth in its podcasting business, strong revenue growth and improved margins in the The advertisement. In the long term, I believe the potential for business growth will come from matching creators with listeners and delivering relevant ads or attractive subscription offers, which is why I chose these metrics . Here’s what I saw in Spotify’s revenue report.

Image source: Getty Images.

Advertising is key for Spotify

Spotify is still relatively new to the advertising market, and it’s essential for the company to start growing and increasing its margins. It is also essential to take into account the context of low advertising expenditure and changes in the transparency of the user tracking of Apple (AAPL -3.66%) this will hurt its monetization in the short term, like all other ad-based streaming companies.

Encouragingly, Spotify’s ad-supported monthly active users grew 21% year-over-year to 252 million and ad revenue jumped 31% to 282 million . Revenue per customer was just €1.12 in the quarter compared to €13.07 per premium customer.

Plan category Revenue per user in the first quarter of 2022 Annual growth rate
Prime €13.07 7%
Supported by advertising €1.12 7.8%

Source: Spotify Q1 2022 Earnings Report.

Right now, overall ad spend is under pressure, so it’s a positive sign that Spotify is growing ad revenue per user while expanding its user base.

On the margins, the news was not so encouraging. After trending positively for most of last year, gross margin for Spotify’s ad-supported service was negative 1.5%, down 584 basis points from a year earlier. Management said this was partly due to seasonality and the additional costs of podcasting, which are all rolled into the advertising business, but the result is disappointing nonetheless.

Premium and Russia

The other two notable trends in the first quarter are that the streamer’s premium user base grew by 15% to 182 million, including 1.5 million customers lost in Russia. Management expects to end the second quarter with 187 million premium subscribers, even taking into account another 600,000 who will be disconnected in Russia.

This 15% growth in the first quarter is a significant growth figure and it seems that management expects more customers to choose premium in the next quarter. As long as Spotify can continue to grow the revenue channel, it will continue to grow.

Essentials for Spotify

There are certainly headwinds for Spotify – the negative impact of the Russian exit, a slowdown in ad spend, a tough economy and fierce competition in music and podcasts. Naturally, customers assess how many streaming subscriptions they are willing to pay for.

But even in this context, the company reported:

  • Monthly active users grew by 19%, including 15% growth in premium subscribers.
  • Revenue increased 24%, including a 31% increase in ad revenue.
  • Gross profit margin fell slightly to 25.2%, partly due to heavy investment in podcast content and infrastructure.
  • Net income of 131 million euros, or 0.21 euro per share.
  • Free cash flow of 22 million euros over the quarter.

Spotify is enjoying double-digit growth, is profitable, and is investing in a podcasting business that could be a big part of its future financial success. I like the direction the company is taking and its earnings trends, even though the market was unhappy with its results this week and sent its shares tumbling.

Sometimes it helps to take a step back and look at company results with fresh eyes rather than starting with analyst opinions as a baseline. Looking clearly now, Shopify’s first quarter results look pretty solid in today’s market.

Comments are closed.