Spotify had a terrible quarter – Here are 5 reasons it’s still a buy
Spotify‘s (NYSE: SPOT) The share price fell after the music streaming giant released its fourth quarter results this week. Its revenue grew 17% year-over-year to reach 2.17 billion euros ($ 2.61 billion), slightly above estimates of 20 million euros. His net loss fell from 1.14 euro per share to 0.66 euro ($ 0.79), but still missed expectations of 0.11 euro per share.
Spotify expects its revenue to grow 14% to 19% in fiscal 2021, but analysts were expecting growth of 21%. This conservative focus, along with its failed results, has apparently scared the bulls off.
Despite these short-term challenges, I think investors should stick with Spotify, for five simple reasons.
1. Its audience continues to grow
Spotify’s Monthly Active Users (MAU) grew 27% year-on-year to 345 million in the fourth quarter, peaking at its previous forecast of MAU 340-345 million.
Its total premium subscribers grew 24% year-over-year to 155 million, exceeding its own forecast of 150 to 154 million subscribers. Its number of ad-supported MAUs increased by 30% to 199 million.
Spotify expects its MAUs to grow another 24% to 27% year-over-year in the first quarter of 2021, and its premium subscribers to increase 19% to 22%.
For the year as a whole, he expects his MAUs to increase by 18% to 24% and his premium subscribers to increase by 11% to 19%. These stable growth rates indicate that Spotify is not losing listeners to big challengers like Apple (NASDAQ: AAPL) Music and Amazon (NASDAQ: AMZN) Music.
2. Its advertising activity is recovering
Spotify’s MAUs and subscribers have increased throughout the COVID-19 pandemic, but the crisis has dampened its ad revenue growth for most of 2020.
This crisis apparently ended in the fourth quarter, as its advertising revenue grew 29% year-over-year to 281 million euros ($ 338 million) and marked the strongest growth in the segment. in three quarters.
This growth was driven by its podcast and ad studio platforms, both of which more than doubled their ad revenue year over year. During the conference call, CEO Daniel Ek noted that Spotify “was always devoting more resources” to its advertising platforms and that these investments had “accelerated” their growth.
3. Its gross margin is stable
Spotify posted a gross margin of 26.5% in the fourth quarter – up from 24.8% in the third quarter and 25.6% in the previous year quarter – which topped its previous forecast by 24.2% at 26, 2%. This expansion can be explained in part by the resumption of its advertising activity.
During the call, CFO Paul Vogel warned that higher investments, especially on podcasts, could weigh on the company’s gross margins throughout 2021, but he remained “optimistic” that Spotify’s revenue growth would eventually outpace its long-term investments.
4. Premium subscriber revenue rebound
Spotify’s average revenue per user (ARPU) of Spotify’s subscription business was down 8% year-over-year in the fourth quarter due to an unfavorable mix of headwinds in currency, flow lower revenues and lower subscription fees in some regions.
However, Spotify still expects its premium ARPU to improve sequentially throughout 2021, presumably as it increases its prices in certain markets and reduces the availability of lower-value family plans.
Spotify’s churn rate for premium users also declined year over year in the fourth quarter, and it expects that decline to continue through 2021. Spotify’s belief that it may continue to increase its prices without triggering more cancellations indicates that it still enjoys pricing power from technological rivals.
5. Reduction of losses and reasonable valuation
Spotify is still not profitable, and its business is stuck between high content licensing costs and infrastructure spending. However, its net loss declined year-over-year in the fourth quarter, from € 209 million to € 125 million ($ 150 million).
Spotify won’t be making a profit anytime soon, but it’s trading at around six times this year’s sales, which is reasonable. price / sale ratio for a leader in a growing market. from China Tencent Music (NYSE: TME), in which Spotify has a stake, is trading at 10 times this year’s sales.
The bottom line
Spotify’s stock may remain volatile for the foreseeable future, but its audience continues to grow as it dominates the global music streaming market. Its fourth quarter earnings report was certainly disappointing, but that doesn’t mean its days of strong growth are over.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.