Ddespite the lack of analyst expectations for ad revenue and subscribers, Spotify (NYSE: SPOT) released positive numbers in its latest earnings report. In this video clip from “The Virtual Opportunities Show” on Motley Fool live, recorded on May 3Fool.com contributors Jose Najarro and Travis Hoium outline some metrics that show now might be a good time to buy stock in the digital music service.
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Jose Najarro: We can see Spotify right now. In the last 12 months it’s down about 56%, definitely taken a big hit. We can also see that the company, when it releases its results, has been affected. But there was good news, all was not so bad for Spotify.
First, they exceeded expectations for revenue and earnings per share. What they missed was ad revenue expectations, I think analysts were expecting about $20, 30 million more than expected on their ad revenue. But then they miss there, it was also one of their biggest quarters for ad revenue, it was about 11% of total revenue. They increased the number of monthly active users, premium subscribers, and added monthly active users year over year and quarter over quarter.
But, there is always a but, they missed analysts’ expectations by about 1 million. Spotify and management say one of the main reasons they lost those expectations is that the overall tensions between Ukraine and Russia caused around 1.5 million subscribers.
They guided about 428 million monthly active users. I think it’s impressive how many monthly active users they have. Few people know it’s that high, 187 million premium subscribers. Again, that would be an increase quarter-over-quarter and year-over-year. They already explain more tensions in Russia and Ukraine and other blackouts.
I mean, they’ve had some great partnerships. First, they partnered with Google [a part of Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL)] Play, the App Store. We have seen a lot of tension between Apple (NASDAQ:AAPL), the App Store, and some players where it’s not just frictionless payments. Unless you want to go through Google or the main provider of rhythm operating systems. But Google and Spotify actually allowed Spotify to have its own payment solutions in the thing. They think it could increase overall growth.
Another thing is that they partnered with Walmart earlier where they offer six month trials to users who apply for Walmart Plus which is like their Amazon (NASDAQ: AMZN) First competitor. They saw a good hit on free cash flow. But one of the main reasons is that they still pay a nice amount in licensing fees. Contrary to netflix (NASDAQ:NFLX), it is a company that does not have too many originals. Most of their podcasts, most of their content that they have on their platform is usually paid to artists and such.
Overall I think it was a good quarter. We’ve seen subscriber growth, which I think we didn’t expect a lot of people to see, especially with everything that’s seen Netflix burn subscribers. But obviously things like free cash flow and some of their other financials taking a big hit might worry some investors.
Travis Houm: I just put a link in Slido, I wrote, I dove into earnings in what I thought of this earnings report. It’s a company I try not to watch the headlines for before I watch the earnings report because exactly what Jose said investors or analysts expect Spotify and then if you don’t don’t touch it, the action is hammered and all headlines are negative.
If you actually look at how they work and think about it in the context of returning to work, the economy is slowing down. We had negative GDP in the first quarter. They are still growing. Subscriptions are growing, users are growing, ad revenue is growing, all at double digit rates. There was a lot to like, I think, from the company. Is it maybe a bit, would you rather it grow at 35% rather than 30%? Sure.
But fundamentally I don’t think anything’s broken about this company, and long term if you’re bullish on Spotify, I think you have to be bullish on podcasting and the commercials that go into podcasting, and those two things are growth. I really like what’s going on there. But it is in one of these companies that it will take five years for this to materialize.
Consider investing in Facebook when they went public, it felt very expensive to them because they hadn’t built that publicity business yet. That’s where Spotify is, but look at the growth you have if you do it right. Spotify has a ton of data and a growing advertiser base. I agree that I think it was a good report even though the market didn’t really like it.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Jose Najarro has positions in Alphabet (C shares) and Spotify Technology. Travis Hoium has positions in Apple and Spotify Technology. The Motley Fool owns and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Netflix and Spotify Technology. The Motley Fool recommends the following options: $120 long calls in March 2023 on Apple and short calls $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.