Spotify Stock Is in Good Shape after Its Q1 Earnings

Spotify (NYSE:SPOT) stock rose on Wednesday after the company reported upbeat results for the first quarter of 2020. The company reported better-than-expected subscribers in the first quarter despite changes in consumers’ behavior amid COVID-19. The stock gained around 11.45% yesterday and touched its 52-week high of $163.94 before closing the trading day at $155.78. At Thursday’s closing price, Spotify’s market capitalization was $28.7 billion.

Notably, Spotify shares have been hit hard since the beginning of the year due to growing fears about the coronavirus. The stock fell around 5.5% in January, followed by a decline of 3% and 11.4% in February and March, respectively. Meanwhile, the stock started to recover in April. The stock has gained around 28.3% as of April 29. Notably, the stock has grown around 14.7% in the past year.

Spotify’s Q1 earnings and revenues

The company reported sales of 1.85 billion euros with a loss of 0.20 euros per share in the first quarter. Wall Street analysts expected the company to post sales of 1.86 billion euros with a loss of 0.47 euros. Last year, Spotify’s revenues were 1.51 billion euros, while the losses were 0.79 euros per share. Despite missing the revenue estimates, Spotify reported more subscribers than analysts predicted, which drove the stock price higher.

In a press release, Spotify said that “every day now looks like the weekend.” Users have to stay home and don’t listen to podcasts in their cars. However, the company said that the listening time has increased at home with “activities like cooking, doing chores, family time, and relaxing at home have each been up double digits over the past few weeks.”

Spotify’s monthly users

In the first quarter, Spotify’s total MAUs (monthly active users) rose 31% YoY (year-over-year) to 286 million. The premium subscribers rose 31% to 130 million, while the ad-supported subscribers rose 32% to 163 million. The streaming giant’s premium subscribers, which accounted for 90% of its total sales, were higher than analysts’ expectations of 128.6 million. Despite uncertainty around COVID-19, Spotify’s monthly subscribers posted YoY growth of above 30% for the third consecutive quarter. Users continued to grow in the North America, Europe, Latin America, and Rest of World regions in the quarter.

The company’s churn also improved by more than 70 basis points YoY with a minor impact from COVID-19 in the quarter. According to an exit survey in the US, more than 80% of the respondents indicated that they would renew their plan after the economic scenario revives.

Although Spotify dominates the music streaming industry, Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) have expanded in the streaming space. As of January 23, Amazon Music had 55 million subscribers. Apple Music subscribers reached 60 million subscribers as of February 19. China’s TikTok is also expanding in the music industry, which might dent Spotify’s market share. TikTok ended with 800 million worldwide active users as of February 17.

Margin growth

Spotify’s gross margin in the first quarter was 25.5%—up from 24.7% in the first quarter of 2019. The gross margins were at the higher end of the estimates due to a gain from non-royalty costs and product mix. While the company’s premium gross margin grew by 220 basis points YoY, its ad-supported gross margin declined by 1,550 basis points YoY in the quarter. In the shareholder letter, the company said, “We continue to believe that our investments in podcasts will benefit the platform as a whole, and see an overall benefit to both usage, engagement, and retention across both Ad-Supported and Premium.”

The company had to delay some of its content production and the release of its shows due to COVID-19. Spotify still expects a reduction in the overall production compared to its original plan amid the crisis.

The company reported 16% growth in its operating expenses in the quarter, which resulted in operating losses of 17 million euros in the quarter. Last year, the operating losses were 47 million euros. The operating loss margin was 0.9% compared to the operating loss margin of 3.1% during the same period in 2019.

Spotify’s free cash flow reached 21 million euros. At the end of the first quarter, the cash and short-term investments were 1.8 billion euros.

What’s in store for Spotify?

COVID-19 didn’t have much of an impact on the company’s business in the first quarter. Except for revenues, the company reiterated its fiscal guidance. Spotify has lowered its revenue expectations to 7.65 billion–8.05 billion euros from 8.08 billion–8.48 billion euros for 2020. Around half of the lower revenue expectations were the result of unfavorable currency, while the remaining lower expectations were due to COVID-19.

Meanwhile, the company still expects total MAUs of 328 million–348 million. The premium subscribers could reach 143 million–153 million for 2020. Spotify’s gross margin could grow to 23.2%-25.2% in 2020, while operating losses could reach 150 million–250 million euros.

In the second quarter, the company expects total MAUs of 289 million–299 million. The number of premium subscribers could reach 133 million–138 million with estimated revenue of 1.75 billion–1.95 billion euros. Spotify’s gross margin could reach 23.3%–25.3% with a forecast operating loss of 45 million–95 million euros.

Analysts expect revenue growth of 18.3% YoY in the second quarter and 19.6% in 2020. They expect a loss of 0.29 euros per share in the second quarter and 1.21 euros per share for 2020.