Spotify (NYSE: SPOT) is the world's largest music and podcast streaming platform by number of users, but it also consistently leads the way on the innovation front. The company is experimenting with technologies like artificial intelligence (AI) to create a more exciting user experience, which could boost engagement and cement its dominance in the industry.
Spotify just released its financial results for the second quarter of 2024 (ended June 30), and its stock soared 12% on the day. The company has spent the past year carefully managing costs to improve its profitability, much to the delight of investors. But CEO Daniel Ek recently outlined an ambitious target for the business by 2030, so this isn't a one-quarter story.
Spotify stock is closing in on a new all-time high, but investors with a spare $350 still might want to buy it now and hold for the long term. Here's why.
Image source: Spotify.
Innovation is one of the keys to Spotify's success
According to Statista, Spotify has a global market share of 31.7% in the music streaming business, with Tencent Music in a distant second place at 14.4%. Most platforms offer exactly the same music catalog, so they have to compete on pricing and technology, and by including non-music content.
Spotify has always focused heavily on the latter two points. The company rolled out a number of unique AI-powered features over the past year, including its AI DJ, which compiles playlists based on what each individual listener likes and uses a software-generated voiceover to commentate during playback. It recently launched a new tool called AI Playlist, which allows users to type in a text-based prompt referencing their feelings, emotions, or even a place to generate a unique musical mix to fit their tastes.
Plus, Spotify is experimenting with a new tool for advertisers called Quick Audio. It uses generative AI to create scripts and voiceovers for their ads, which could save them time and money in the creative process.
On the content side, Spotify is home to over 6 million podcasts. The company recently signed a new $250 million multiyear deal with The Joe Rogan Experience , which is one of the world's most popular shows. Plus, Spotify is rapidly expanding its catalog of audiobooks, which now stands at 250,000 titles. Premium subscribers get 15 hours of audiobook listening each month, with the option to pay extra to add more time. That creates a new revenue stream for the company.
Spotify's investment into new technologies and the expansion of its content catalog are designed to boost engagement. Free users who spend more time on the platform will consume more ads, which translates into more revenue for Spotify. Premium users, on the other hand, might be more amenable to price increases if the platform occupies a larger part of their day.
Rapid revenue growth, despite managing costs
There were a record-high 626 million monthly active users on Spotify in Q2, which was up 14% from the year-ago period. The platform had 393 million free users (monetized through advertising) and 246 million premium subscribers. The premium figure came in 1 million above the company's forecast, which is key because paid users make up 88% of the top line.
Total revenue was $4.1 billion in the second quarter, equaling 20% growth from the prior-year period. But here's the real story for investors: Spotify's gross profit margin came in at a record 29.2%, well above management's guidance of 28.1% thanks to favorable costs on the music content side. Plus, the company reduced its operating expenses by 16.5%, led by cuts to marketing and research and development .
The combination of the above factors led to $296.8 million in net income (profit), which was the highest quarterly result in the company's history. It was also a big swing from the $327.2 million net loss it generated in the year-ago period.
The bottom line: Spotify managed to maintain solid revenue growth and roll out a slate of new features while at the same time trimming costs across the board and delivering a record profit.
Spotify is chasing an ambitious long-term goal
Spotify stock only needs to gain another 7.5% to surpass its all-time high, which was set during the tech frenzy in 2021. Based on the company's recent operational performance, it's likely to get there sooner rather than later.
Longer-term, however, there could be significantly more upside. Spotify believes it can reach 1 billion monthly users by 2030, and that would drive significant growth in both its revenue and earnings. Plus, Spotify increased its subscription prices last year, and it's in the process of rolling out another hike in most major markets right now. As the platform's content catalog continues to expand, it will be able to command a higher price from consumers, which will make each subscriber more valuable over the long run.
Based on Spotify's trailing-12-month revenue of $15.7 billion and its current market capitalization of $67.5 billion, its stock trades at a price-to-sales (P/S) ratio of 4.3. That number has ticked up recently, but it's still 34% below its peak P/S ratio of 6.5, so Spotify shares look like a good deal despite inching toward their all-time high.
Factor in the company's long-term growth potential, and the stock looks like a great buy for the next decade.
Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Spotify Technology and Tencent. The Motley Fool has a disclosure policy .
Most Popular
Comments / 0