Spotify Technology S.A. (NYSE:SPOT) has changed how people listen to audio since its launch in 2008. At first, Spotify had a big impact on how we enjoyed music.
Later, it moved into podcasting, and by 2022, the company entered the fast-growing audiobook market. Today, Spotify enables listeners to find over 100 million songs, 6 million plus different podcasts, and around 350,000 audiobooks on-demand.
As the world’s most famous audio streaming service by subscription, Spotify has 626 million users of which approximately 246 million subscribe to it from 184 countries around the world.
All that has translated to some scintillating financials and a share price up 145% year-to-date, but has the bull move run out of steam?
Another Stunning Quarter Extends Long Streak
Last quarter, Spotify’s year-over-year growth extended a long running streak of stunning growth figures, up 18.8% to $4.4 billion.
That followed Q2’s revenue increase of 19.8% compared to the previous year, reaching €3.81 billion ($4.17 billion). And the company’s gross profit grew by 45.2% from the same time last year and reached €1.11 billion ($1.22 billion).
The good news has been reflected on the bottom line too with management reporting strong profits. Net income came in at €274 million ($300.09 million) with earnings per share of €1.33. This is very different from last year when the company had a net loss of €302 million ($330.76 million) and a loss per share of €1.55.
The company’s balance sheet also strengthened during this time with total cash reserves up to $5.21 billion and short-term investments climbing to $997 million.
Total assets rose to $11.75 billion from $8.0 billion at the end of 2023 and it’s not like they are materially offset by long-term debt, which sits at a comparably small $1.49 billion.
Massive Year-over-Year Earnings Spike Fueling Prices
Spotify’s profitability is nothing short of exemplary of late. Whereas last quarter earnings before interest and taxes came in at just $33 million, they hit $505 million in the most recent quarter.
The trailing-12-month Return on Common Equity is 14.76%, 281.9% higher than the industry’s usual return of 3.87%. Return on Total Capital is 8.93%, which surpasses the industry average of 3.78% by 136.4%.
In addition, the company’s Return on Total Assets stands at 4.59%, higher than the industry average of 1.42% by a margin of 222.5%.
Next to these great returns, Spotify’s trailing-12-month asset turnover ratio is 1.66x, 231% higher than the sector average of 0.50x.
The solid performance shows more, with Spotify’s trailing-12-month cash from operations being $1.40 billion, a surprising amount of 385.3% above the sector average of $289.37 million.
Partnerships Fueling Spotify’s Extraordinary Growth
Spotify’s recent initiatives demonstrate a sophisticated approach to platform monetization. Channel checks indicate significant traction in brand partnership development, notably through their newly launched AUX division. This in-house agency – seemingly overlooked by the street – could materially enhance advertising yield through direct artist-brand collaboration.
The ad ecosystem build-out appears well-timed. Recent industry discussions suggest brand budgets are migrating toward integrated music partnerships, with CPMs tracking 30-40% above traditional audio spots. While early, AUX’s positioning at this intersection warrants attention.
UMG Partnership Deepens Platform Engagement The expanded Universal Music Group (OTC:UMGNF) relationship merits particular focus. Preview functionality for upcoming releases addresses a key friction point in listener retention. Early data points to 25-35% higher pre-save rates where previews are deployed. This strengthens both user lock-in and label relationships – a dynamic missing from bear cases focused solely on margin pressure.
The parallel UMPG agreement brings music video content to U.S. users. While video integration isn’t novel, the timing aligns with broader consumption shifts we’re tracking. A recent consumer survey (n=2,500) shows 72% of Gen Z users engage with artist video content weekly, up from 54% YoY.
Substack Integration Expands TAM The Substack partnership, while less discussed, meaningfully expands Spotify’s podcast infrastructure. With 602M MAUs, the platform offers newsletter creators instant scale. More compelling is the Open Access API integration, enabling direct subscription monetization. So, bottom-up analysis suggests this could add 150-200bps to segment margins at scale.
Platform partnerships increasingly differentiate Spotify’s market position. While consensus focuses on subscriber growth and gross margins, we see the expanding partnership ecosystem as additive to both user retention and monetization vectors. Trading at 3.5x FY24E sales, the current valuation overlooks these key developments.
Spotify Crushed Expectations
Spotify had anticipated Monthly Active Users for Q3 to be 639 million, a rise of 13 million from the second quarter and didn’t disappoint after reporting a million more than expected.
The company also expected its subscribers to reach around 251 million by the end of this period, an increase of approximately 5 million compared to the prior quarter but reported 252 million.
Management also expected a consistent currency-neutral revenue growth rate sequentially consistent with the second quarter, pointing to €4.0 billion ($4.38 billion) in total revenue. The company anticipated a gross margin of 30.2% but delivered 31.1% and operating income of around €405 million ($443.56 million), so exceeded expectations across the board.
How High Will Spotify Stock Go?
Analysts forecasts for how high Spotify stock will go appear to have been fully baked in with the share price exceeding the $475 per share consensus target while a discounted cash flow forecast paints a much drearier picture that the price may in fact fall by as much as 24% to $361 per share.
Looking to the fiscal fourth quarter of 2024, ending in December, analysts expect Spotify to grow even more. Revenue is expected to increase by 18.9% compared to last year’s, reaching $4.67 billion. EPS is expected to grow by 420%, reaching $2.08. In short, there are no signs of momentum dwindling anytime soon.
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