What happened
Shares of Spotify (SPOT +1.16%) are up 13.1% so far this week, according to data provided by S&P Global Market Intelligence. The global audio streamer reported its third-quarter results before the market opened on Wednesday, and beat revenue expectations for the period.
So what
According to the report, Spotify broadly exceeded expectations. Revenue came in at $2.95 billion, beating analysts' consensus estimate of $2.9 billion.
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On the user side, both monthly active users (MAUs) and premium subscribers grew by 19% year over year. The company now has 381 million MAUs around the globe and 172 million premium subscribers who are paying a monthly fee for ad-free music listening. The growth of users and subscribers recovered from Q2, when Spotify saw a temporary slowdown in growth that it blamed on COVID-19 outbreaks in its high-growth international markets.
Another highlight from the report was the continued growth of advertising revenue, which was up 75% in the period; Spotify is on pace to do well over $1 billion in ad sales this year. The company is pushing heavily into podcast advertising with its new Spotify Audience Network, an automated advertising marketplace for music and podcasts that is similar to how YouTube advertising works. The continued rapid growth of this segment was likely welcome news for shareholders.
Now what
After this week's gains, Spotify has a market cap of close to $55 billion. That gives it a trailing price-to-sales ratio (P/S) of approximately 5 based on its $10.8 billion in trailing-12-month revenue. For a company with a low gross margin of 26.7% in the latest quarter, that's not a cheap valuation. However, if Spotify can achieve its goal of getting to 1 billion users and can continue growing its premium and advertising businesses at double-digit-percentage rates, its P/S ratio (relative to its current price) should come down rather quickly, which would be a good thing for shareholders.
