Spotify Earnings: Impressive Listener Growth Indicates Network Effect, but Monetization Lags

We are maintaining our $170 fair value estimate, no-moat rating, and Very High Morningstar Uncertainty Rating for Spotify SPOT. The stock is down 14% in intraday trading in reaction to second-quarter results and trading more than 15% below our fair value estimate. Nevertheless, we recommend new investors wait for a slightly wider margin of safety.

In our view, Spotify’s second-quarter subscriber and overall user growth, plus improvements in listener acquisition costs, displays the formation of a network effect. However, the monetization piece is lagging, as demonstrated by the year-over-year decline in revenue generated per listener during the quarter. We expect monetization to improve in the second half of this year and through 2024 due to the firm’s price increases and less hesitancy by advertisers. On the bottom line, excluding costs related to attempts to operate more efficiently, operating losses improved, which likely will continue through the rest of the year. We still project full-year profitability in 2024.

Total revenue of EUR 3.18 billion was up 11% (14% excluding currency headwinds), driven by 11% growth in the premium segment and 12% growth in the ad-supported segment. Spotify impressively increased its subscriber count for premium (up 17% to 220 million) and ad-supported (up 34% to 343 million) listeners from last year, which more than offset the monetization declines of 6% for premium and what we estimate was 16% for ad-supported. Lower subscriber monetization was mainly due to product mix, while the decline in revenue generated per ad-supported listener was because of uncertainty by advertisers; we still expect this will improve in the second half, especially given Spotify’s impressive listener growth.