What happened

Shares of Spotify (SPOT 2.40%) soared as much as 21.3% this week, according to data from S&P Global Market Intelligence. The digital audio platform posted strong user growth in its fourth quarter report, which pleased investors on Wall Street. As of this writing, shares are up 19.9% this week and almost 50% year to date (YTD), making it one of the hottest stocks of early 2023.

So what

On Jan. 31, Spotify released its earnings for the last three months of 2022. Monthly active users (MAUs) grew 20% year over year (YOY) to 489 million in Q4, handily beating management's previous guidance for the period. By the end of Q1, the company expects to hit half a billion MAUs around the globe, making Spotify one of the largest internet platforms out there.

As for the rest of the business, premium subscribers grew 14% YOY to 205 million, also surpassing internal guidance. Solid paying subscriber growth led to total revenue hitting $3.45 billion, up 18% YOY. While all these metrics look good, Spotify is still unprofitable, posting a $252 million loss in the quarter. This isn't a huge deal, but it is something investors need to track in the coming years.

Spotify's advertising revenue also was not very strong, growing 14% YOY in Q4 to $490 million. In the past few years, the company has made major investments in podcasts it is trying to monetize through its new advertising network. Over the long term, it will need to keep growing advertising revenue at a double-digit rate to recoup all the money it has spent building out the podcast business.

Now what

According to management, 2022 will be the year of peak losses for Spotify, with operating margins starting to improve in 2023. Six percent of the workforce was just laid off, which will help with expenses as we move through 2023. The company will also likely start seeing leverage in its podcast advertising business, which is not yet two years old. Right now, advertising is running at a gross margin of just 5.1%, which management expects to rise north of 30% a few years down the line.

Overall, Spotify had a solid Q4 report, and it isn't surprising to see the stock rocket higher in the days after the release. If the company can continue to grow MAUs, convert them to premium subscribers, and build the advertising business, the stock will probably perform well for shareholders over the long haul.