Spotify Q2 earnings preview: SPOT has gained over 55% YTD, is a profit turnaround coming?

As Spotify Technology SA (NYSE) prepares to release its Q2 2024 earnings on July 23rd, several key indicators point to a robust performance.

Analysts and investors are keenly observing the streaming giant’s results, which are expected to show significant improvement in profitability and revenue growth.

With a projected earnings per share (EPS) of €1.02, a stark contrast to the €1.55 loss per share reported for the same period in 2023, Spotify is poised to demonstrate substantial financial gains.

This analysis explores the factors contributing to Spotify’s anticipated strong performance and the strategic initiatives that have driven its growth.

Revenue growth and strategic initiatives

Spotify is expected to report revenue of €3.8 billion for Q2 2024, representing a 20% increase from the €3.18 billion reported in Q2 2023.

This impressive growth can be attributed to several strategic initiatives implemented by the company in the first half of 2024.

These initiatives include the introduction of new pricing tiers and the expansion of audiobook services, both of which have contributed to additional revenue streams and increased user engagement.

The new pricing tiers have allowed Spotify to cater to a broader audience by offering more flexible subscription options.

This strategy not only attracts new subscribers but also helps retain existing ones by providing tailored plans that suit different user needs.

Additionally, the scaling of audiobook services has tapped into a growing market, further diversifying Spotify’s revenue sources.

User growth and premium subscribers

Spotify’s user base continues to expand at a remarkable pace. The company expects to add approximately 15 million net new monthly active users (MAUs) during the quarter, bringing the total MAUs to 631 million.

This growth reflects Spotify’s successful efforts in attracting new users through its innovative offerings and global reach.

In terms of premium subscribers, Spotify anticipates reaching 245 million, marking an addition of 6 million net new subscribers during the period.

This increase in premium subscribers underscores the effectiveness of Spotify’s pricing and bundling strategies, which have made premium plans more appealing to users.

The bundling strategy, which includes music, podcasts, and audiobooks, provides a comprehensive audio experience that enhances user satisfaction and loyalty.

Profitability and cost management

Spotify’s profitability has seen a significant turnaround, with the company forecasting an operating income of €250 million for Q2 2024.

This includes €13 million in social charges, compared to an operating loss of €247 million in the same quarter last year.

The improved profitability is driven by higher revenue and effective cost management.

Gross margin is expected to be 28.1%, up from 25.2% in Q2 2023. This increase is attributed to improvements in music, podcasting, and other cost of revenue.

By optimizing its cost structure and negotiating better deals with content providers, Spotify has been able to enhance its margins while continuing to invest in its platform.

Impact of foreign exchange rates

While Spotify’s revenue growth is impressive, it is important to note that the company faces a 140 basis point headwind to growth year-over-year due to foreign exchange rate movements.

This impact highlights the challenges of operating in a global market with fluctuating currency values.

However, Spotify’s diversified revenue streams and strong performance in key markets help mitigate these effects.

Price increases and bundling strategy

One of the notable strategic moves by Spotify in 2024 has been its decision to implement price increases across several markets.

On June 3rd, Spotify announced plans for price adjustments in the US, following successful price increases in the UK and Australia.

These price hikes range from $1 to $3 per subscriber per month and are expected to have significant implications for the company’s financial performance.

Deutsche Bank analysts estimate that the US price increase alone could contribute approximately €70 million to Q3 2024 revenue, assuming the changes take effect mid-July.

On an annualized basis, the revenue impact is projected to exceed €300 million by 2025.

This marks the second time within a year that Spotify has raised prices, reflecting the company’s confidence in its market position and the perceived value of its services.

In addition to price increases, Spotify has also introduced a higher-priced audio bundle that includes music, podcasts, and audiobooks.

This bundling strategy, now available in markets representing approximately 50% of Spotify’s user base, is designed to maximize user engagement and capitalize on the increasing consumption of diverse audio content.

What are analyst projections showing?

Looking ahead, analysts are optimistic about Spotify’s financial outlook. The company’s guidance for Q3 2024 is expected to reflect continued strong performance, driven by the recent price hikes and bundling efforts.

Analysts project revenue of €3.79 billion for Q2, which is slightly conservative compared to Spotify’s own guidance of €3.8 billion.

Similarly, Spotify’s guidance calls for €250 million in operating income, versus the analyst consensus of €220 million.

In terms of user growth, analysts expect Spotify to report 15-17 million net additions in MAUs and 5-6 million net additions in premium subscribers for Q2. This reflects year-over-year growth of around 15% and 11%, respectively.

The consistent growth in users and premium subscribers highlights Spotify’s ability to attract and retain customers in a competitive market.

Valuation and target price

Based on the positive outlook and strategic initiatives, analysts have raised their target price for Spotify stock, which has gained 56.7% year-to-date.

Source: TradingView

An updated average revenue per user (ARPU) assumption for 2030 to $44, up 10% from previous estimates, reflects Spotify’s aggressive monetization efforts.

Additionally, a lower cost of equity assumption by 50 basis points to 8.5% has been factored in, considering the lower risk premia across the equity asset class.

As a result, the target price for Spotify stock now stands at approximately $453, suggesting close to 50% upside compared to the company’s trading price as of early July 2024.

This valuation underscores the market’s confidence in Spotify’s growth trajectory and its ability to generate long-term shareholder value.

Spotify’s Q2 2024 earnings report is poised to demonstrate substantial growth in profitability and revenue, driven by strategic initiatives and effective cost management.

The company’s ability to increase prices and introduce new service bundles without significant churn highlights its strong market position and the perceived value of its offerings.

As Spotify continues to expand its user base and enhance its monetization efforts, the outlook for the remainder of the year and beyond remains positive.

Investors are likely to view the upcoming earnings report as a validation of Spotify’s strategic direction, with potential announcements such as a share buyback program further boosting confidence.

Overall, Spotify’s strong performance and strategic initiatives position it well for continued growth and long-term success in the competitive music streaming industry.

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