Spotify, the Swedish music streaming pioneer, is showing after 18 years that it is not only a great product but could also have a successful business model. The company dominates the audio streaming market with 626 million monthly active users worldwide.
Last week, Spotify reported its second consecutive quarter of profits. Net profit was €274 million, compared to a loss of €302 million in the same period last year. There is a prospect that the company will post an annual profit for the first time in its history.
The stock has more than doubled in the past 12 months. The forecast net profit of 1.3 billion euros this year is a welcome change from the roughly 4 billion euros net loss the company has accumulated over the past eight years.
Nevertheless, the stock appears to be quite expensive with a price-earnings ratio of 41. Spotify is reaching the limits of how quickly it can increase profits.
The company has been aggressively cutting costs, announcing three rounds of layoffs last year, including plans to cut nearly a fifth of its workforce in December. These measures helped cut operating costs in the second quarter by 16 percent year-on-year to €846 million.
The gross margin increased by more than 500 basis points to 29.2 percent. However, these savings cannot be repeated every year. The largest cost factor remains the license fees and remuneration to the artists. The cost of sales rose by 12 percent to 2.7 billion euros in the second quarter.
The good news is that Spotify’s price hikes are bearing fruit. The company has raised prices for its premium subscribers twice in the past 12 months. Users have largely accepted this. Spotify ended the second quarter with 626 million monthly active users, an increase of 14 percent from the same period last year.
Within this group, the number of paying subscribers rose by 12 percent to 246 million. The remaining users rely on free, ad-supported accounts. Spotify faces a delicate balancing act. Results from Universal Music Group indicate that Spotify has extended its lead over Apple and Amazon.
But its premium subscriptions now cost more than its competitors, leaving less room for further price increases. There are talks of a new ultra-premium tier for audiophiles. Increasing advertising revenue also offers potential. However, it will be harder to increase profits without users jumping ship.
news-source"> Quelle: Eulerpool Research Systems
