Big news came out of Sweden on Feb. 2 when Spotify (SPOT 1.08%) released its fourth-quarter and full-year earnings report. The global audio streamer put up solid growth numbers and is making great progress expanding beyond music streaming. However, with weak monthly active user (MAU) guidance for the first quarter of 2022 and the recent controversy around the Joe Rogan Experience, investors have so far decided to sell off Spotify in 2022. As of this writing, shares of Spotify are down a whopping 29% year to date (YTD).
This sharp price drop to start 2022 provides a great buying opportunity for investors with a long-term time horizon. Here are three numbers from the latest earnings report that will make you ecstatic about Spotify's growth potential.
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1. 406 million MAUs
As it has done every quarter since going public in 2018, Spotify grew the number of MAUs on its service last quarter. In Q4, Spotify had an estimated 406 million MAUs across the globe, up 18% year over year. This might not seem like explosive growth, at least compared to how fast some viral social networks like TikTok or Instagram can grow users within a calendar year. But Spotify has been able to put up durable user growth that has ballooned the size of its service in just five years. In Q4 of 2017, Spotify only had 160 million MAUs, which means it has grown its user base by over 150% over the last five years. If this type of growth continues, Spotify should have close to or over 1 billion MAUs five years from now.
Spotify's mission is to have billions of people using its audio platform regularly. This is a bold goal and will require a lot of growth from its current base of less than 500 million MAUs. With the ubiquity of music/audio content, the continued growth of smartphone usage worldwide, and a projected global population of 8.5 billion people in 2030, I think it is plausible that Spotify can achieve its mission this decade.
Why are users so important? Because they fuel the growth of Spotify's two businesses: music subscriptions and advertising.
2. Premium gross margin of 29.2%
Spotify's MAUs are important to track because they lead to future subscribers of Spotify's ad-free music service. In Q4, the company had 180 million premium subscriptions, up 16% year over year. In Q4 of 2017, Spotify had 71 million paying subscribers, which means it has grown its premium service by 150% over the last five years, tracking almost perfectly with overall MAU growth.
The most important metric for Spotify's premium business is gross margin. In Q4, premium gross margin was 29.2%, up 0.33% year over year. This expansion has been steady since Spotify went public. In Q4 of 2017, Spotify's premium gross margin was 27.3%. Investors should expect margins to continue expanding as Spotify rolls out its high-margin promotional marketplace for musicians and labels to advertise on its service.
On top of subscriber growth and margin expansion, premium average revenue per user (ARPU) grew 3% year over year in Q4 to $5.02. According to management on the conference call, churn has continued to come down (they don't give out exact churn numbers). This combination of overall growth, margin expansion, ARPU growth, and declining churn is a sign that Spotify's premium business is in a very healthy spot right now.
3. Ad-supported revenue growth of 40%
A few years ago, advertising was an afterthought for Spotify, only thought of as a funnel to help bring users to its premium service. But after making heavy investments into podcasts and building out its own streaming advertising technology, Spotify thinks this business can grow to much larger heights over the next three to five years.
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So far, the results have been strong. In Q4, Spotify's advertising segment grew 40% year over year, bringing in $450 million for the company. Gross margins for the segment are only 10.8% right now, but that is because many of the initiatives are still in the early stages and require a lot of upfront costs. These include licensing exclusive shows (all podcast content costs get included in the cost of revenue), building out its internal podcast studios, and the Spotify Audience Network (SPAN, its new streaming advertising marketplace for podcasts and music). Over time, management expects advertising revenue to have higher gross margins than its premium business, which investors should expect within the next few years.
With steady user growth, expanding gross margins, and a resurgent advertising business, Spotify is set to compound its revenue at a 20%+ clip for the foreseeable future. Eventually, underlying profitability should follow suit. With the stock now at a market cap below $32 billion and a price-to-sales ratio of only 2.8, right now looks like an opportune time to take a position in Spotify.
