Spotify Technology (SPOT 1.58%) has been delivering music to investors' ears with shares returning more than 55% thus far in 2024.
The audio-streaming giant recently reported its first-quarter results highlighted by strong growth and expanding margins.
The latest trends mark an impressive turnaround compared to the company's volatile history of elusive profitability since its 2018 IPO. Spotify now appears to have finally found the right formula for more consistent earnings which is great news for the stock.
Even with shares up big this year, I believe the rally has more room to run.
Spotify is off to a strong start in 2024
Spotify management calls 2024 the "year of monetization" with the strategy evident through impressive operating and financial trends.
The story has been the momentum in the Spotify premium service which counts 239 million subscribers worldwide, up 14% year-over-year. Account-sharing options including Family and Duo plans have proven popular.
Image source: Getty Images
That increase in the subscriber base has been coupled with a series of price hikes in key markets leading to a 21% increase in total revenue on a constant currency basis.
For example, the monthly individual plan for users in the United States is currently $10.99 compared to $9.99 last year. Globally, premium average revenue per user is up 7% with the company planning further increases this year. The result has been a sharply higher gross margin of 27.6%, up from 25.2% in Q1 2023.
The other important dynamic has been an increased focus on efficiency.
Last December, Spotify announced a major headcount reduction, laying off nearly 17% of its workforce while moderating its marketing spend. Those steps are contributing to the positive earnings backdrop.
Q1 operating income of EUR168 million, approximately $178 million in US dollars, was a record for the company and reversed a loss of -EUR 156 million or $165 million in US dollars in Q1 2023. Similarly, free cash flow has also accelerated, reaching EUR 828 million over the last twelve months.
Spotify Interim Chief Financial Officer, Ben Kung projected optimism for a continued improvement in earnings through the rest of the year. From the earnings call prepared remarks:
We remain confident that we've entered a new chapter in terms of expanding the business's cash generation potential...
From a profitability standpoint, we continue to expect a sequential ramp in gross margin through the balance of 2024, as well as improvements in operating income and operating margin.
What's next for Spotify?
There's a lot to like about Spotify as an industry leader, well-positioned to capture strong demand for streaming audio. Beyond music, podcasts and audiobooks on the platform are also growth drivers.
Maybe the most positive data point for Spotify is its success at expanding outside the North American and European markets.
Users outside those core regions now represent 54% of the total 615 million monthly active users, up from 49% last year, or just 39% in 2020. The opportunity is for the company to convert this new cohort of users into paid subscribers, adding to the earnings and cash flow tailwind.
In terms of valuation, Spotify is trading at approximately 60 times forward earnings according to an average of Wall Street estimates. While that multiple can be interpreted as pricey, I believe the premium is justified given the company is still in the early stages of its monetization journey.
It likely won't be a straight line higher, but I expect Spotify to continue delivering positive returns.
