At the end of 2022, Spotify (SPOT) stock was trading below $80 a share after a disastrous year for investors that erased over $35 billion from the company’s market cap.
Today, shares are trading at just under $500. The audio giant is on track to hit full-year profitability for the first time ever. And its market cap? About $100 billion, up from just $15 billion two years ago.
The company’s colossal run-up in stock price follows an intense business overhaul that’s included everything from mass layoffs and C-suite shakeups to a major strategic shift away from podcasts, an area it had aggressively pursued.
At the company’s 2022 Investor Day, Spotify set seemingly lofty objectives that included long-term gross margin targets between 30% and 35%. At the time, the company had been struggling to turn a profit, with its gross margin stuck at around 25%.
In the most recent quarter, Spotify said its gross margin increased to 31.1% from the prior year’s 26.4%.
“We’ve never been in a stronger position, thanks to what’s really been an outstanding execution by the Spotify team,” CEO Daniel Ek said during the company’s fiscal third quarter earnings call in November. He added, “We are where we set out to be, if not a little bit further, and on a steady path toward achieving our long-term goals.”
Wall Street analysts who cover Spotify have a median price target of just around $486 a share with 29 Buy ratings, eight Holds, and just three Sells, according to the latest Bloomberg consensus estimates.
Spotify, one of the stock market’s big pandemic-era trades, saw shares balloon in early 2021 as the company sought to broaden its business from music streaming to other areas of the audio market.
At the time, the company’s endeavors echoed moves from other tech giants in pursuit of that goal. Think heavy spending on hiring and deep-pocketed investments in growth initiatives. For Spotify, that was podcasts.
Between 2019 and 2021, Spotify spent $1 billion pushing into the podcast market, signing on celebrities like the Obamas, Prince Harry, and Kim Kardashian. The company paid $230 million to acquire podcast studio Gimlet in 2019. Spotify then paid a reported $200 million to bring Joe Rogan exclusively to the platform, and another $200 million for the Ringer in 2020.
Spotify has staged an epic comeback, with its stock price increasing sixfold over the past two years. But the journey to get here hasn’t been easy. (AP Photo/Patrick Semansky, File) ·ASSOCIATED PRESS
But the spending era was short-lived as investors and analysts began to focus on the company’s lack of profitability and cash flow issues, questioning the staying power of the business model and the credibility of CEO Daniel Ek.
It’s hard to make money in the audio streaming business, largely due to the sky-high price of content. And compared to its main competitors — deep-pocketed tech behemoths like Amazon (AMZN), Alphabet’s YouTube (GOOG, GOOGL), and Apple (AAPL) — Spotify has had an even tougher time absorbing those costs.
At the same time, companies in the space have to invest to expand their offerings to win market share. At Spotify, not only was spending aggressive, but a soft advertising market further crimped profit margins. Management attempted to assuage fears with promises that 2022 was a peak investment year and that profitability metrics would begin to improve in 2023. Skepticism still rang high.
“Heading into 2023, investors looked at their targets and thought they were very overly ambitious,” Morgan Stanley analyst Ben Swinburne told Yahoo Finance in an interview.
“It really wasn’t until they started to see the company make some proactive moves to drive both top-line growth, but also improve the profits of the company, that investors started to come back to the stock.”
Turnaround efforts first began in early 2023 as the company reorganized and consolidated business units. It adjusted its podcast strategy to focus more on reaching bigger audiences as opposed to maintaining exclusive content. It also changed up its royalty structure to combat streaming fraud and curb the massive volume of music on the platform, which has escalated as a result of generative AI.
But the changes picked up steam over the course of last year, culminating in the fourth quarter when “two really important things happened as it relates to the stock performance,” Swinburne said.
No. 1, in Swinburne’s view, was price increases. Spotify implemented a broad set of price hikes across roughly 70% of its footprint by revenue in mid-2023. The hikes were “much larger and broader than they’d ever done before as a company,” the analyst said.
Second: massive cost-cutting. The company laid off 17% of its workforce, or about 1,500 employees, in December 2023. This followed a combined 800 employees who were laid off earlier in the year as a result of several restructurings.
At the time, the significant reduction in headcount was estimated to 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 that aggressive of cost action while their revenue growth was accelerating, but it was happening at the same time the price increases were being put into place,” Swinburne said.
“So you had this dual effect of faster revenue growth combined with reduced expenses, which really set the company up into 2024 with a rapidly improving profit profile.”
Soon after the December layoffs, Spotify also announced that its CFO Paul Vogel would step down from his position after eight years. Vogel, who joined Spotify in 2016 as head of investor relations before taking over the CFO role in 2020, exited his position 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 massive potential: audiobooks.
“The audiobooks launch is much bigger than audiobooks,” Swinburne explained. “It’s really about transitioning Spotify from a music-only service to a bundle.”
“Spotify was able to show the value of the product to consumers because it had no noticeable churn increase from all of the pricing changes,” Swinburne said. “And then, because they transitioned to a bundle, the margins of the business got meaningfully better.”
To that point, the long-term gross margin goal of 30% to 35% Ek set out for has already been achieved, with the metric once again expected to climb in the fourth quarter to 31.8%.
“I think this demonstrates what we’ve been saying over the past year,” Ek said last month. “Spotify is not just a great product but well on its way to become a great business.”
The proof is in the numbers: Spotify has continued to attract (and not lose) users despite higher prices. Its engagement remains the strongest among competitors, and the value-add of new bundles and premium offerings only strengthens its position.
But perhaps most importantly, it’s finally making money. And that’s always music to investors’ ears.
