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Spotify (SPOT) Q2 Report Before Bell: Can User Growth Continue?

Daniel Laboe

Earnings season is reaching the peak of its excitement with almost 1,000 companies listed on US stock exchanges releasing their 2nd quarter results this week. Spotify SPOT, the world’s largest music streaming service, is releasing its earnings before the bell on Wednesday, July 31st.

SPOT analysts are estimating record sales numbers of $1,829, which would represent a 22% increase from the same quarter last year. Analysts are also predicting an EPS of -$0.51, which would demonstrate a 16% deficit improvement per share. Keep in mind that this is a European company and the financial are denominated in Euros so the initial release will not reflect these dollar-denominated estimates.

This is a fast-growing company and financial results, unless way out of line, will not impact price as much as user growth. Gaining market share and an active user base are the most critical components for this firm right now.

SPOT has had a negative share price reaction on all of its earnings releases since its direct listing on NYSE last April.

Management Guidance

Management is estimating that MAUs will grow to between 222 and 228 million, illustrating a 23-27% year-over-year (YoY) increase. Total premium subscribers are expected to be 107 – 110 million or 29%-34% growth from Q2 last year. Spotify’s management team is also expecting a gross margin of 23.5-25.5%.

The Business

Subscription-based business model is becoming the gold standard in the tech world today. We have seen it with Netflix’s NFLX TV & movie streaming service, which has taken in recent years sending valuation multiples surging. Consistently growing revenue year-over-year and quarter-over-quarter, allowing investors to be comfortable with absurdly high multiples.

Spotify is the global leader in subscription-based music streaming. This business model is expected to expand SPOT’s topline for this year and next by 27 and 24% respectively.

Spotify’s top competitors include Apple Music AAPL, Amazon Prime Music AMZN, YouTube Music GOOGL and Tencent Music TME. These other platforms struggle to compete with Spotify’s ‘freemium’ model, ease of platform navigation, and podcast content in which Spotify is investing heavily.  

Spotify is in the midst of heavy investment into its podcast content, which is expected to dip into H2 margins. The firm is hoping that a solid podcast platform with exclusive content will drive higher ad revenue and improve user retention.

Currently, Spotify has 217 million MAUs (up 26% YoY) and 100 million Premium subscribers (up 32% YoY).

Last year Spotify and Tencent Music made a share swap deal where Spotify acquired a 9% stake in its Asian peer, and Tencent gained a 7.5% stake in SPOT. This diversified each of the firms’ portfolio’s giving them exposure in markets that they are not a leader in.

Performance & Valuation

SPOT has rallied over 35% this year so far and still about 22% off its all-time highs. The company is in the process of a $1 billion share repurchase program and has repurchased $225.5 million as of Q1 with more buybacks likely having occurred this quarter. This repurchase program has been a contributing factor in SPOT’s 2019 rally.

SPOT is trading at a 3.2x forward P/S, which is right at the stock’s median valuation multiple since it went public last year. This valuation is in line with the S&P 500’s average P/E.

Take Away

Analysts have been raising estimates on SPOT over the last month pushing this stock into a Zacks Rank #2 (Buy). I would be hesitant to jump into this stock before the earnings release tomorrow morning considering that every report since the company made their shares public in the US has had an adverse price action.

User growth and management guidance changes are going to be the key metrics to focus on in Spotify’s Q2 earnings. When listening to the earnings call or reading the transcript, keep your ears peeled for color on progress in the podcast segment which management hopes will allow the firm to be the clear global leader in on-demand audio streaming.

 

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