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Why Spotify Soared 25% in April

By Andrew Tseng - May 5, 2020 at 8:25AM

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How has the company been doing during the COVID-19 lockdowns?

What happened

Shares of Spotify (SPOT 0.73%) soared 24.8% in April, according to data from S&P Global Market Intelligence.

That move sent the stock from $121 per share to $152 per share during the month. For context, the stock had traded as high as $155 in February before the COVID-19 panic began in the U.S. and bottomed around $118 per share in March. 

So what

The big news in April was Spotify's first-quarter earnings report, which was released last Wednesday. The company grew monthly active users (MAUs) by 31% to 286 million, premium subscribers by 31% to 130 million, and ad-supported MAUs by 32% to 163 million.

Total revenue grew 22% to over 1.8 billion euros, while gross margin expanded by 0.8% to 25.5%. Remarkably, the subscriber cancellation, or churn, rate improved by 0.7% year-over-year despite the global pandemic. And of those who do cancel, about 70% return to Spotify within 45 days.

A young woman dances while listening to music on headphones.

Image source: Getty Images.

These results were a welcome relief for Spotify shareholders because it hadn't been clear how Spotify's business would hold up while so many people remain housebound. Certainly, Spotify usage in the car has plummeted because far fewer people are commuting these days. On the other hand, Spotify usage has exploded by over 50% on TVs and gaming consoles as more people listen at home.

The company's management team was bullish on the company's two-sided marketplace initiative, whereby labels and artists to promote new music to Spotify users. In the past, Spotify CEO Daniel Ek has referred to this business as having "software-type margins," which are very high.

Now what

Spotify's business has continued its torrid growth, and all signs point to continued growth in April. The competition certainly doesn't appear to have negatively impacted Spotify's growth either.

Over the long term, the company is benefiting from the long-term trend away from linear radio toward on-demand streaming. Investors should consider Spotify one of the biggest winners of that trend.

Andrew Tseng owns shares of Spotify Technology. The Motley Fool owns shares of and recommends Spotify Technology. The Motley Fool has a disclosure policy.

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