Spotify’s stock surged by 7% in after-hours trading on Wall Street after reporting a record-high operating profit of 5.3 billion Swedish kronor in the third quarter. The stock price has more than doubled since the beginning of the year, with the streaming giant now approaching the coveted 1 trillion kronor market cap.
Peter Benson, the responsible publisher and analyst at Placeras, closely monitors the company and has owned shares since the spring of 2022. He describes the report as excellent, highlighting the 19% year-on-year increase in revenue and an 11% growth in the number of users.
“In addition, we see a fantastic improvement in profitability, which has been a major issue for Spotify over the years. They have actually managed to reduce costs by 8%, which is quite impressive,” Benson commented.
The gross margin increased to a record high of 31.1%, with the company aiming to further sharpen it to 40% by the end of 2032. Benson emphasizes this as one of the key metrics to watch in the future.
Spotify has previously been disliked on the stock market when the company was seen as a middleman, condemned to a thin margin due to pressure from record labels on one end and free services on the other. That narrative is now being disproven as they have a gross margin that is rising significantly,” Benson added.
One of the few weaknesses in the report was advertising revenue, which only increased by 6% compared to a year earlier. However, Benson believes that the US election could be a turning point, as Donald Trump and his ally J.D. Vance’s strategy of focusing on podcast interviews was a major success.
“They call this ‘The Podcast Election,’ and I find that very interesting. So far, the advertising space on Spotify has not been valued so highly. But this could be a catalyst where advertisers start to invest more in the audio market, and then Spotify has a unique position,” Benson explained.
Another untapped potential is the Asian market, where Spotify has not yet made a significant impact. The analyst believes this could become an important issue in the future as markets begin to saturate in Europe and North America. At the same time, Benson also sees a significant potential to extract more money from the existing user base.
“The average revenue is five dollars per month for paying subscribers, which is not a lot. Over a couple of years, that figure could potentially double,” Benson projected.
Regarding the valuation after the stock surge, Benson stated, “If you leave Sweden, move to Silicon Valley, and put on your tech stock hat, it can be justified. Spotify is valued at roughly five times sales, which is not high if you have a bright future. The company has the wind in its sails, and looking a few years ahead, it’s not difficult to envision doubled revenue.”
When asked about his own ownership, Benson mentioned, “I will not buy more at these levels, but I will not sell either. The stock has taken off, but at the same time, the performance has been very good, so it is justified. From here, there will probably be no quick profits, but if you like Spotify’s product and believe in the medium, as I do, it’s fun to continue owning the stock.”
In terms of reevaluating the investment, Benson expressed, “If a competing service emerged that was noticeably better and reflected in subscription numbers, that could potentially be very challenging if one of the tech giants with unlimited resources began giving things away for free. There is also always a risk of mutiny from artists and record labels.”
Benson also added that a possible scenario is one of the Faang companies making a bid for the streaming giant. However, he hopes that Spotify’s CEO, Daniel Ek, will continue to grow the company on his own rather than being acquired.
“I hope it doesn’t happen, and that Daniel Ek perseveres for another 20 years and makes this ten times bigger. Some say he is the best Swedish CEO, and it’s hard to argue against that. It’s clear that Spotify is a super success,” Benson concluded.
Overall, Spotify’s third-quarter results indicate a strong performance with potential for further growth and expansion into new markets. The company’s strategic focus on profitability and innovation in content delivery positions it well for sustained success in the competitive streaming industry.