Spotify Technology has been a standout performer in the technology sector since its public debut in 2018, with a 19% annual total return that surpasses the S&P 500's 14% over the same period.
However, the company faced challenges in 2021 and 2022, experiencing an 80% drawdown in its stock as investors expressed concerns over profitability. Despite hitting a low of $75 per share, Spotify has made a remarkable recovery and is now valued at nearly $100 billion in market capitalization.
In the latter part of 2022, Spotify faced difficulties with a negative operating margin of 7%. This decline was due to rising operating expenses from expansion into podcasts and advertising, as well as increasing costs associated with content licensing. However, the company has implemented cost controls that have led to a significant improvement in its financial metrics. Operating expenses have decreased, and gross margins have reached an all-time high of 31.1% in the most recent quarter.
Spotify's recent revenue growth can largely be attributed to successful price hikes for its premium subscriptions. The company has managed to implement these increases in key markets, including the United States, with minimal impact on customer retention. This suggests that Spotify may have been underpricing its premium service. While price increases can boost shareholder value, they are not a sustainable long-term strategy. Therefore, Spotify needs to focus on user acquisition and diversification into new segments beyond music.
Spotify's monthly active users (MAUs) have seen impressive growth, rising 11% year-over-year to reach 640 million. This growth is particularly pronounced in emerging markets such as Southeast Asia and India. Spotify's foray into audiobooks has also shown promise, contributing to the acceleration of growth in this category. As the company continues to attract new users, it aims to engage them not only with its music offerings but also with its expanding portfolio of audio content.
Analysts project that Spotify could achieve a 15% annual revenue growth rate over the next five years. This optimistic outlook is based on the company's pricing power, user growth, and successful expansion into new audio segments. If Spotify can maintain its growth trajectory, it is anticipated that its operating margin could rise to 15% within the same timeframe. This would position the company to generate approximately $33 billion in revenue and nearly $5 billion in earnings by the end of the five-year period. While the stock has experienced a significant rally, the high expectations set for its future performance may warrant a cautious approach for potential investors.
In light of these developments, investors should carefully consider their strategies. While there may be no immediate reason to divest from Spotify, adding to existing positions or initiating new investments could be viewed as unwise at this juncture. The company's impressive growth over the past year has set high expectations, and maintaining this momentum will be crucial for sustaining investor confidence. Spotify's ability to balance growth with profitability will be a key factor in determining its long-term success in the competitive streaming landscape.