Report
Ali Mogharabi
EUR 850.00 For Business Accounts Only

Morningstar | Spotify 1Q Subscriber Base Sees Boost, but Accompanied by Ad Revenue Pressure; Maintaining $130 FVE

Spotify reported mixed first-quarter results, as its premium subscriber base helped improve revenue and margins, but pressure on ad pricing and Spotify’s changing library of offerings moderated results. Still, earnings were roughly in line with our expectations, and we continue to think the company will turn a profit starting in 2020—especially with Spotify’s promising efforts to better monetize the podcast industry. We are therefore maintaining our $130 fair value estimate. Although the stock is down in reaction to the mixed results, it remains in 3-star territory. We continue to recommend a wider margin of safety before investing in this no-moat and very-high-uncertainty name.

Spotify reported total fourth-quarter revenue of EUR 1.5 billion, up 33% year over year as the firm’s premium subscriber count increased 32% from last year, reaching the high end of management’s guidance at 100 million premium subscribers. The firm reported significant growth from family and student plans (which have lower monthly subscription prices) as well as U.S. and Canada geographies as the firm continued its Google promotion in those regions—in which plan subscribers received a Google Home Mini. While the promotion didn’t lead to as many subscriptions as management expected, due to lacking inventory, we think the company sees the partnership as helpful in the race against Amazon Music, which has a much larger presence in home speakers as opposed to mobile. The firm reported monthly active users at 217 million for the quarter, a 16% year-over-year increase. While overall, Spotify’s track record for subscriptions was rosy, ad-supported revenue growth of 24% year over year came in below management’s expectations because of ad pricing. However, Spotify’s acquisition of Gimlet Media, which has helped the company push out recent exclusive podcasts, served as a slight buffer to pricing effects.

Average revenue per premium user was flat compared with last year because of continuing change in Spotify’s product mix and its offerings in new geographies, like India. We look for only low-single-digit ARPU growth as the company expands to new geographies, but we’re encouraged by the prospect of higher ad-supported ARPUs as a result of Spotify’s efforts to better monetize podcast advertisements. Podcast advertisements have historically not been customized to individual users based on their unique data—which Spotify is looking to change.

Premium and ad-supported gross margin were mixed. Premium gross margins for the quarter were 25.9%, down by 20 basis points year over year—but better than expected because of Spotify’s growing premium subscriber base. Ad-supported gross margins, on the other hand, were 11%, down by 160 basis points from last year.
Underlying
SPOTIFY TECHNOLOGY SA

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Ali Mogharabi

Other Reports on these Companies
Other Reports from Morningstar

ResearchPool Subscriptions

Get the most out of your insights

Get in touch