Spotify (NYSE:SPOT) owns more than 30% market share as the most popular music streaming platform but propping up profitability has been a persistent fly in the ointment.
Last year, Spotify broke into profitability for the first time which begs the question, can it be consistently profitable and why is the bottom line so choppy historically?
Spotify’s Improving Profitability Scenario
Spotify started trading on Wall Street in 2018 after a direct listing and quickly became a solid top line grower. But there was always an issue with the bottom line and spiky profitability.
Essentially,Spotify’s financials reveal as far back as 2016 that the streaming music giant has been unprofitable. Yet that all changed last year and now savvy investors are wondering if the future is brighter than the past?
Annual revenues have grown each and every year at a rapid pace, with management regularly posting double-digit year-over-year growth rates. The average annual revenue growth rate is 24% and the highest growth recorded between 2016 and 2017 was 39%, while the lowest between 2022 and 2023 at 13%.
In 2024, top line growth ballooned by 18%, posting a figure of $17.74 billion. The top line has kept the company buoyant over the year but what about Spotify’s net losses?
Losses deepened in some years, while in others, it managed to post a small figure in the red. Last year, after years of falling short of breakeven, the company posted a positive net income of $1.29 billion, which was a huge turnaround from a loss of $602.07 million in 2023. On a per-share basis, management posted an annual EPS of €5.50, compared to a loss of €2.73 in the prior year.
Last year, the company also posted four quarters of positive net income, as opposed to only one quarter in the prior year. Spotify’s profits also picked up pace, rising sequentially in every quarter. EPS was €0.97 in the first quarter, rose to €1.33 in Q2, then to €1.45 in Q3, and finally finished the year posting a €1.76 EPS in the fourth quarter.
Cost Cutting Boosts Bottom Line
The solid results that Spotify posted last year were a result of the efforts it took to address this issue. The company’s founder and CEO, Daniel Ek, believes that this result is due to “countless improvements and tweaks” it made over the prior two years.
The leadership team decided to enact significant cost-cutting to prop up its bottom line, while trying to keep growth intact. Like the 17% workforce reduction in 2023, slashing about 1,500 jobs amid the tech layoff spree.
There have also been hikes in prices. Last year, subscription prices for premium services in the U.S. across the Premium, Duo, and Family plans were all hiked. That was the second price bump in the span of one year. Spotify Premium prices for individuals were modified from $10.99 per month to $11.99 per month.
This year, Spotify has already rolled out price hikes to its subscribers in the Benelux region. In the Netherlands and Luxembourg, individual subscriptions now cost €12.99 ($14.70), up by 18% from €10.99 ($12.44). In Belgium, individual plans now cost €11.99 ($13.57), 9% higher than it was.
It’s Not Just About Music Anymore
Spotify has evolved to become a hub for audiobooks and podcasts as well as streaming music. And now, management is doubling down on that tectonic evolution by investing €1 million, or $1.13 million, to further the audiobook catalog beyond English. The initial focus? French and Dutch titles, as Spotify looks to gain traction in France and the Netherlands, two markets where audiobook adoption has lagged.
This is clearly a shot across the bow at Audible, who currently dominates the space. But the game won’t be easily won because producing audiobooks isn’t cheap, especially in less widely spoken languages, so Spotify has teamed up with ElevenLabs to let authors create AI-narrated versions of their work, helping reduce those costs.
Nonetheless, music is the central value prop that Spotify offers to its end-listeners, and it shelled out $10 billion in royalties last year alone to maintain its market stance. By the way, that figure will surely climb higher this year following a multi-year deal it just signed with Universal Music Group, covering both recorded music and publishing.
The platform’s user base looks like a linear growth chart with Spotify hitting 675 million monthly active users last quarter for a 12% increase from the year before, and comfortably ahead of the 664.3 million analysts had forecast. Premium subscribers also rose to 263 million, up 11% year-over-year.
Can Spotify Ever Become Consistently Profitable?
Looking ahead, Spotify is expecting some seasonal weakness. After the solid quarter that the company posted due to growth in developing markets, the leadership team is looking to prioritize retaining higher-value users rather than lower-engagement users. So, while Spotify expects the profitability streak to continue, the catch is that there will likely be some moderation.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.
