Shares of Spotify (SPOT -7.28%) recently ran up to a 52-week high thanks to another well-received earnings report. Markets cheered because the company's first-quarter results blew the doors off previous expectations.
In January, Spotify told investors to expect around 11 million new monthly active users during the first three months of 2023. Instead, the music streaming service added a whopping 26 million monthly active users. That made it the company's best first quarter ever for member additions.
This wasn't the first time in recent memory that Spotify blasted past expectations, and investors have noticed. The stock has risen around 69% since the beginning of 2023. Is it still a good stock to buy following a giant run-up this year? Let's look a little closer at recent results to find out.
What competition?
Unlike video streamers, which produce original content, the music available from one subscription-based service to the next is nearly identical from the consumer's perspective. Despite the commoditization you might expect in this niche, Spotify is holding its share of the market.
Its biggest competitors, Amazon and Apple, didn't share new-user numbers from their music businesses in their first-quarter reports. But if they were taking market share from Spotify, they would most likely boast about it to investors.
In the first quarter, Spotify reported that revenue from premium subscribers rose 14% year over year to 2.7 billion euros ($3 billion). Advertising budgets are under pressure from a looming recession, but revenue from the platform's ad-supported service still grew 17% year over year.
The company is no longer the only music streamer that includes access to podcasts, but that didn't stop first-quarter podcast revenue from rising 20% year over year. At the end of March, the number of publishers and shows participating in the Spotify Audience Network was up by a double-digit percentage compared to the end of last December.
The bad news
Over the past few years, revenue at Spotify has more or less kept up with operating expenses, but not lately. The company hired a lot of new people in 2022, but in January, it turned around and laid off around 6% of its workforce.
SPOT revenue (TTM) data by YCharts. TTM = trailing 12 months.
First-quarter operating expenses jumped 36% year over year, which was much faster than revenue. Altogether, the company's operations lost 156 million euros ($172 million) in the first quarter.
The layoffs Spotify announced in January haven't had a chance to work their magic on the bottom line. It's also been a long time since the company raised subscription prices. With 210 million paid subscribers, a small price increase could quickly push its bottom line into positive territory.
A buy now?
At recent prices, you can buy shares of Spotify for 2.1 times trailing sales. That's a much lower price than investors saw during its first few years as a publicly listed company.
When I bought Spotify stock a little over a year ago, it was trading at a much lower price-to-sales multiple, and revenue had been outpacing operating expenses. I'm not about to sell my shares, but I'm probably not going to buy more until recent cost-cutting and price increases actually allow the company to report a sustainable net profit.
