At the end of 2022, Spotify (SPOT) shares were trading below $80 per share, following a disastrous year for investors that saw more than $35 billion wiped off the company’s market cap.
Today, shares trade at just under $500. The audio giant is on track to post a full-year profit for the first time ever. And the market capitalization? About $100 billion, compared to just $15 billion two years ago.
The colossal rise in the company’s share prices followed an intensive corporate overhaul that included everything from mass layoffs and executive shake-ups to a major strategic shift away from podcasts, an area the company had aggressively pursued.
At the company’s 2022 Investor Day, Spotify set seemingly lofty targets, including long-term gross margin targets of between 30% and 35%. At the time, the company was struggling to make a profit, with gross margin stuck at around 25%.
In the most recent quarter, Spotify said gross margin rose to 31.1% from the previous year’s 26.4%.
“We have never been in a stronger position, thanks to what has been truly outstanding execution from the Spotify team,” CEO Daniel Ek said during the company’s third-quarter earnings call in November. He added: “We are where we want to be, if not a little bit further, and on a steady path toward achieving our long-term goals.”
Wall Street analysts covering Spotify have an average price target of about $486 per share with 29 Buy ratings, eight Holds and just three Sells, according to Bloomberg’s latest consensus estimates.
Spotify, one of the stock market’s big trades in the pandemic era, saw its shares skyrocket in early 2021 as the company looked to expand its business from music streaming to other parts of the audio market.
At the time, the company’s efforts mirrored moves by other tech giants pursuing that goal. Consider heavy spending on hiring and deep investments in growth initiatives. For Spotify, that was podcasts.
Between 2019 and 2021, Spotify spent $1 billion entering the podcast market, attracting celebrities like the Obamas, Prince Harry and Kim Kardashian. The company paid $230 million to acquire podcast studio Gimlet in 2019. Spotify then reportedly paid $200 million to bring Joe Rogan exclusively to the platform, and another $200 million for the Ringer in 2020.
But the spending era was short-lived as investors and analysts began to focus on the company’s lack of profitability and cash flow problems, calling into question the staying power of the business model and the credibility of CEO Daniel Ek.
It’s difficult to make money in the audio streaming industry, largely due to the sky-high price of content. And compared to its main competitors — deep-pocketed tech giants like Amazon (AMZN), Alphabet’s YouTube (GOOG, GOOGL) and Apple (AAPL) — Spotify has had an even harder time absorbing those costs.
At the same time, companies must invest in the space to expand their offerings to gain market share. At Spotify, not only was spending aggressive, but a weak advertising market further squeezed profit margins. Management tried to allay fears with promises that 2022 was a peak year for investments and that profitability figures would start to improve in 2023. Skepticism was still high.
“Heading into 2023, investors looked at their targets and found them very ambitious,” Morgan Stanley analyst Ben Swinburne told Yahoo Finance in an interview.
“It wasn’t until they saw the company taking a number of proactive steps to both drive revenue growth and improve the company’s earnings that investors began returning to the stock.”
Turnaround efforts began in early 2023 when the company reorganized and consolidated business units. It has adjusted its podcast strategy to focus more on reaching a larger audience rather than maintaining exclusive content. It also changed its royalty structure to combat streaming fraud and curb the sheer volume of music on the platform, which has escalated due to generative AI.
But the changes gathered steam over the course of last year, culminating in the fourth quarter, when “two very important things happened in terms of stock performance,” Swinburne said.
Number one, according to Swinburne, was the price increase. Spotify implemented a broad range of price increases across about 70% of its revenue footprint in mid-2023. The increases were “much larger and broader than they had ever done before as a company,” the analyst said.
Second: huge cost savings. The company laid off 17% of its workforce, or about 1,500 employees, in December 2023. This followed a total of 800 employees who were laid off earlier this year as a result of various restructurings.
At the time, it was estimated that the significant workforce reductions would lead to approximately 300 million euros ($315 million) in annualized cost savings for fiscal year 2024.
“I don’t know if I’ve ever seen a company take such aggressive cost action while revenue growth was accelerating, but it happened at the same time that price increases were being implemented,” Swinburne said.
“So you had this dual effect of faster revenue growth combined with lower costs, which really allowed the company to head into 2024 with a rapidly improving earnings profile.”
Shortly after the layoffs in December, Spotify also announced that CFO Paul Vogel would be stepping down from his position after eight years. Vogel, who joined Spotify in 2016 as head of investor relations before taking over the role of CFO in 2020, left his role on March 31. Christian Luiga has since stepped into the role.
The efforts didn’t stop there. This year, Spotify has doubled down on another growth area with huge potential: audiobooks.
“The launch of audiobooks is much bigger than audiobooks,” Swinburne explains. “It’s really about Spotify’s transition from a music service to a bundle.”
The company introduced a more expensive audio bundle that includes music, podcasts and audiobooks. It also introduced an audiobook-only plan and a music-only streaming tier in an effort to cater to a variety of consumers. The changes allowed the company to raise prices for the second time in less than a year.
“Spotify was able to demonstrate the value of the product to consumers because there was no noticeable increase in churn due to all the price changes,” Swinburne said. “And when they moved to a bundle, the company’s margins improved significantly.”
To date, the long-term gross margin target of 30% to 35% Ek has already been achieved, with the benchmark expected to rise again to 31.8% in the fourth quarter.
“I think this shows what we have been saying over the last year,” Ek said last month. “Spotify is not only a great product, but also on its way to becoming a great company.”
The proof is in the numbers: Spotify has continued to attract (and not lose) users despite higher prices. The company’s commitment remains the strongest among competitors, and the added value of new bundles and premium offers only strengthens its position.
But perhaps most importantly: it is finally making money. And that is always music to the ears of investors.
Alexandra Canal is a senior reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
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