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Why Spotify Stock Surged Higher After Q3 Earnings

Nov 5, 2021

Shareholders have good reason to be excited.

Spotify Technology (NYSE:SPOT) is a pioneer in the streaming audio space. Its platform provides on-demand access to music and podcasts, and with over 380 million monthly active users, Spotify is the industry leader. 

In this Backstage Pass video, which was recorded on Oct. 27, Motley Fool contributor Jose Najarro discusses Spotify's third-quarter earnings report, highlighting the metrics that sent the stock soaring.

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Jose Najarro: For those not familiar with Spotify, it is the music subscription service. They are a European-based company, so they do report in euros. Quarter three was about €2.5 billion. This beat expectations -- it was actually up 27% year over year. Their premium subscribers, and this is where they make most of their money, premium subscribers were 172 million and that was up 19% year over year and that also beat expectations. I believe analysts were expecting somewhere around 171.5 million in premium subscribers. This was an important point -- I believe this is why the stock price went up a nice amount.

A lot of people probably thought Spotify was a nice COVID play, where only people working from home are listening to their services, so they weren't expecting much growth. But we can see with the premium subscriber beat, this is one that it's not only a COVID play. I'm guessing a lot of people now going back to work with the overall commuting, they're probably listening to their podcast or music. One thing is, though, Spotify has definitely taken quite a hit from its 52-week high. I believe it's down over 25% from its 52-week high.

Right now, in the past year, the SP 500 has been outperforming it. But we can see for the outlook, their outlook for quarter four, I want to say it's a bit steady. It was at the midpoint of the outlook that they gave, it was somewhere near a steady place for where analysts expect. They expect revenue to be somewhere between €2.54 billion to €2.68 billion. They expect about 177 million to 181 million premium subscribers. I think those are some strong numbers, we're still seeing quarter-over-quarter beat and year-over-year beat.

Another thing I do want to mention is, like I mentioned, the premium revenue is the biggest segment for Spotify. We can see almost €2.2 billion out of that €2.5 billion comes from their premium revenue. If you're paying for Spotify right now, that's where that revenue segment is coming from. That was up 22% year-over-year. The second segment of their revenue is the ad-supported revenue. This is €323 million out of that €2.5, so little bit over 10% that actually grew 75% year over year. This is something I was watching out for, because I believe the ad-supported revenue might have had some impact with things like iOS changes. But a lot of that ad support came from podcasts. I'm guessing now Spotify since they know you're listening to an investing podcast, you're more likely to be purchasing something in the investment type of market. I guess Spotify has a little bit more insight on their consumers compared to some of these other advertisers out there. I'm happy to see that 75% year-over-year growth on revenue.

A bit of concerns, one of the things that they mentioned is one of the reasons they saw a huge growth in subscribers was they did have a nice amount of, not sponsorships, but offerings, say subscribe for three months for free. One thing I want to see is how many of those subscribers are going to stay after those free trials are done. Brian, I don't know if you might have any questions on Spotify.

Brian Withers: Yeah. This looks like a well-executed quarter from Spotify's perspective. I'm looking at the 5 million to 9 million subscriber growth quarter over quarter. Then that ad-supported revenue just juices their profit line. I think shareholders should be excited about this quarter from Spotify.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Brian Withers has no position in any of the stocks mentioned. Jose Najarro owns shares of Spotify Technology. Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Spotify Technology. The Motley Fool has a disclosure policy.

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