Spotify earnings preview: Investors eye subscribers, podcast uncertainty

Yahoo Finance’s Allie Canal joins the Live show to discuss the earnings expectations for audio streaming giant Spotify.

Video Transcript

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RACHELLE AKUFFO: Spotify set to report fourth quarter earnings on Tuesday before the opening bell. Yahoo Finance reporter Allie Canal is here with what we can expect from the music streamer. Allie, what are you expecting?

ALEXANDRA CANAL: Hi, Rachelle. And Spotify had a really rough 2022, with the stock losing more than 2/3 of its value. And if you look at the stock performance since we saw that record high in February 2021, the stock is still down about 65%. So investors are really going to be focused on this earnings report to see if there are any improvements when it comes to profitability along with gross margins. Now, here are top and bottom line expectations, and reminder that Spotify does report in earnings.

Estimates for revenue coming in at roughly 3.2 billion euro on an adjusted loss of roughly 1.30 a share. Total monthly active users, that's expected to tick higher to reach 479 million. On a premium subscriber basis, those numbers expected to grow 7 million in the quarter to reach 202 million, with ad-supported users estimated to come in at about 287 million. That would be a 14 million jump compared to Q3.

But again, I think the main focus here is going to be on gross margins. Those numbers did disappoint in the third quarter, sending shares down about 13% following the results. When it comes to Q4, those numbers are pretty muted in comparison to Q3. Current estimates calling for around 24.5%. So anything less than that, you will likely see a major sell-off. And really, this is a narrative that Spotify has been grappling with for quite some time. Really solid top line growth, really solid subscriber numbers, but those medium to long-term investments, especially when we think about podcasting, that's just been hammering the bottom line. And investors, they don't have the patience for it anymore.

RACHELLE AKUFFO: I mean, when you think about how podcasting especially blew up during the pandemic when people were under lockdown, different story now. So, I mean, will Spotify be forced to pivot that growth at all cost strategy in order to reach those profitability targets?

ALEXANDRA CANAL: That certainly seems to be the vibe over these past few weeks heading into earnings, especially after last week, when we saw Spotify lay off 6% of its workforce, restructure the business. Dawn Ostroff, who led that podcast division, she will now be stepping down. And it seems like Spotify is finally starting to understand that it's very expensive to create original programming.

It's very expensive to lure these high-profile celebrities for podcasting. I mean, if you look at some of these deals, we're talking hundreds of millions of dollars for deals with Joe Rogan, Kim Kardashian. So there needs to be a better way. Spotify has been developing advertising technology for audio so it can take advantage of those ad dollars.

The company did reiterate to Yahoo Finance that 2022 was that peak investment year, and that in 2023, you'll start to see incremental improvements on profitability, on operating income. But this is going to be a long-term effort. And investors really, really want to see improvements. So I think we're going to see a pivot in this podcasting strategy. And I also think-- I know subscribers don't want to hear this, but I do think we could see some price hikes, especially with YouTube Premium and Apple Music recently hiking prices as well. So we'll see if we get any of those announcements on the earnings call tomorrow morning for Spotify Q4 results.