Spotify stock (NYSE:SPOT) has maintained strong momentum lately, reflecting an acceleration in user and revenue growth. Despite boasting over 600 million monthly active users (MAUs), Spotify keeps attracting paying subscribers and ad-supported members rapidly. The company is also recording a strong valuation multiple expansion, driving improved profitability. This trajectory could very well persist, moving forward. Yet, investors should be wary about the stock’s valuation, which appears too high. Thus, I am neutral on SPOT stock.
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Q1 Results: Excellent User, Revenue Growth
Spotify’s Q1 numbers marked another period of excellent user and revenue growth. Despite already numbering more than 600 million users, Spotify keeps attracting new crowds to its platform at a rapid pace. In the meantime, the company enjoys strong pricing power, which, along with a larger number of users and strong advertising results, led to an acceleration in revenue growth. Let’s take a deeper look.
Starting with user growth, Spotify had 615 million MAUs at the end of the quarter—a 19% rise from the previous year. In particular, premium MAUs saw a solid increase of 14%, reaching a total of 239 million, while ad-supported MAUs saw an even more significant increase of 22%, reaching 388 million.
At the same time, total revenues grew by 20% year-over-year to €3.64 billion (or 21% Y/Y in constant currency). This growth was powered by the following:
- Premium revenue growth of 20% year-over-year (or 21% in constant currency),
- This, in turn, was driven by subscriber gains and higher average revenue per user (ARPU), which grew by 7% compared to last year, marking ~200 bps of quarter-over-quarter acceleration compared to Q4 of 2023.
- Ad-Supported revenue growth of 18% year-over-year (or 19% in constant currency), as you can see below.
Note the significance of the 20% surge in revenues, as it signals an acceleration compared to the previous five quarters. Revenue growth came in at 17.7%, 14.3%, 10.9%, 10.6%, and 16.0% from Q4-2022 to Q4-2023, respectively. Therefore, Q1 2024 sustained the ongoing, strong sequential acceleration in the top-line growth.
Impressive Margin Expansion Fuels Profitability Prospects
Shifting gears toward the bottom line, Spotify exhibited a strong margin expansion in the quarter. In fact, excluding a single quarter in its history, Q2-2021, its 27.6% gross profit margin in Q1-2024 was the highest in its history.
It marked an expansion of 243 basis points compared to last year, driven by improved music and podcast profitability, a decline in Other Costs of Revenue (which, from what I understand, is linked to a decline in streaming delivery costs), partially offset by increased Audiobook-related costs.
We see here that Spotify is starting to enjoy some of the benefits of favorable economies of scale. The shift from spending on audiobooks versus podcasts also seems smart, as the former seems like a more saturated space these days.
I believe Spotify will never be able to grow its gross profit margin above 30% from music alone due to the hefty royalties it has to pay artists and labels. However, audiobooks could be an avenue for an improved gross margin moving forward through bundling and other profit pool mechanisms.
Promising Guidance, But Shares Remain Expensive
Spotify’s Q2 guidance appears quite promising, suggesting that its ongoing user and revenue growth momentum is set to be sustained. That said, I continue to find shares quite expensive, which explains my neutral stance on the stock.
Specifically, management expects €3.8 billion in revenue in Q2, implying a 22% year-over-year increase. This shows that Spotify’s revenue growth will remain alive for another quarter. Also, management sees Spotify’s gross margin reaching 28.1%, retaining its upward trajectory.
However, despite such strong top-line growth and an ongoing margin expansion, Spotify shares still seem expensive at their current levels. At 61.6 times and 43.2 times Wall Street’s FY2024 and FY2025 earnings-per-share estimates, the stock is attached to a premium valuation. I understand the market’s willingness to pay a hefty price for a dominant platform with sustained growth and massive user retention rates. Yet, the current valuation seems to leave little to no margin of safety for current investors.
Is SPOT Stock a Buy, According to Analysts?
Looking at Wall Street’s view on the stock, Spotify Technology features a Moderate Buy consensus rating based on 19 Buys and seven Holds in the past three months. At $349.26, the average Spotify stock price target suggests 11.4% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell SPOT stock, the most accurate analyst covering the stock (on a one-year timeframe) is Mark Kelley from Stifel Nicolaus, with an average return of 53.9% per rating and a 67% success rate.
The Takeaway
Overall, Spotify’s impressive user and revenue growth and its ongoing notable margin expansion clearly stress its strong operating momentum. The company’s ability to attract both paying subscribers and ad-supported users bodes well for future prospects. That said, given the stock’s current premium valuation, caution is warranted. Thus, I believe that maintaining a neutral stance on the stock seems prudent until a more favorable entry point arises.
