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Stock Analyst Update

Mixed Quarter for Spotify, but Raising Fair Value

Although we're more confident in the no-moat firm's ability to operate more efficiently while aggressively growing its number of listeners, shares remain overvalued.


 Spotify (SPOT) kicked off its first year as a publicly traded firm with mixed March quarter results as revenue came in a bit shy of consensus (in line with our internal estimate), but cost control helped lower operating loss significantly. While premium subscribers and overall listeners continued to grow, average revenue per user, or ARPU, declined much more than expected. Management maintained the full-year guidance it had initially provided on March 26. We adjusted our revenue estimates slightly lower as lower ARPU will more than offset the increase in subscribers, weighing on top-line growth. However, given the firm’s first-quarter performance, we are also now more confident about its ability to operate more efficiently while aggressively growing its total number of listeners. For this reason, we upped our margin assumptions resulting in a higher fair value estimate of $124 per share (from $118) for Spotify. While Spotify shares are trading down 8% in after-hours, we still view this no-moat and very high uncertainty name as overvalued.

Total revenue came in at EUR 1.1 billion, up 26% over last year, driven by a 47% growth in Spotify’s premium subscribers. Total listener count at the end of the quarter was 173 million, up 29% year over year. First-quarter ARPU declined 14% year over year and 10% sequentially, indicative of the firm’s aggressive customer acquisition strategy. Spotify’s operating loss of EUR 41 million was significantly lower than last year’s EUR 139 million as the company controlled costs such as R&D, sales and marketing, and G&A, to offset the impact of the lower ARPU. We note that once ARPU stabilizes and gross margin widens a bit, the firm is likely to begin investing more aggressively in R&D to come up with additional features for the app, which we view as necessary for Spotify to protect its market-leading position.

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Ali Mogharabi does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.