Key Takeaways
- Spotify shares rose 8% today after the company added 6 million premium subscribers in the third quarter, 1 million more than it had guided for.
- Spotify is adding paying users and widening its margins at the same time, so the stock’s jump today looks earned.
- Earnings per share of €2.48 missed the €2.80 analysts expected, but the shortfall came from lower finance income and a bigger tax bill below operating income.
- Spotify guided for €820 million of fourth-quarter operating income, and the next test is whether it reaches 316 million subscribers by year-end.
Spotify Technology (SPOT) shares are up 8% today after its third-quarter report showed more paying subscribers than it had promised and a record gross margin. Its fourth-quarter profit forecast also came in above Wall Street’s estimates, Reuters reported.
That’s all happening on a day the Nasdaq-100 is down more than 1%.
Co-CEO Alex Norström said in prepared remarks that Spotify’s “costs are moderating, and there is more runway ahead.”
The details
Here’s what Spotify reported before Thursday’s open:
- Premium subscribers: 306 million, up 9% from a year earlier, on 6 million net adds
- Monthly active users: 788 million, up 11% and in line with guidance
- Revenue: €4.97 billion, up 16% (14% in constant currency)
- Gross margin: 33.0%, a third-quarter record and up 136 basis points from a year ago
- Operating income: €672 million, just ahead of the €670 million it guided for
The margin is the number I’d watch. Spotify’s gross margin has risen every year since 2022…
…and fourth-quarter guidance calls for 33.8%, up from 33.1% a year earlier.
TIKR tracks 40 analysts on Spotify. How many say “Buy”?
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The miss is below the line
Earnings per share fell 24% from a year earlier to €2.48 and missed estimates. But operating income actually grew 15%. The drop came further down: finance income fell to €62 million from €262 million, and last year’s €72 million tax benefit became a €187 million tax expense this year.
Spending is the real risk. Operating expenses rose 26%, led by marketing and cloud and AI costs that management expects to come down, and free cash flow fell 9% to €735 million.
What’s next
For the fourth quarter, Spotify expects 316 million subscribers, €5.2 billion of revenue and €820 million of operating income, up 17% from a year earlier. The revenue figure is a bit below the €5.24 billion analysts expected, according to Bloomberg’s consensus, but the subscriber target is above it.
Analysts already expect earnings to keep climbing…
And a profit outlook above estimates gives those numbers more room to rise than fall.
The stock traded at 35x forward earnings at Wednesday’s close. After today’s jump, it’s closer to 38x.
My take: Spotify keeps growing its subscriber base and its margins together, and that’s worth paying up for. Of course, it still has to add the 10 million subscribers it’s promising this quarter, and the spending has to cool the way management says it will.
So what is Spotify stock actually worth?
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Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. Our analysis might not include recent company news or important updates. TIKR has no position in any of the stocks mentioned. Thank you for reading, and happy investing!
