Warren Buffett once said, “You don’t find out who’s been swimming naked until the tide goes out.” Well, it seems the tide is gone for tech stocks most especially streaming media platforms.
First, Netflix, then Google and now Spotify, Wall Street’s faith in tech stocks is done and it seems like a matter of time before they all become strangers on these streets.
What started as a good growth story is now becoming a faltering story.
Spotify Technology (SPOT) started out as a response to music piracy, offering music fans free service with ads, with the hopes of them upgrading to a paid subscription. The streaming leader later expanded into the podcast business, owning content it can generate revenue but these spendings are becoming more than the profit realised and investors are not happy. For years, the streaming leader stock has soared, we have seen it expand to different countries, give good content and designs with little to no profit, still, investors overlooked it.
The market has changed and now Wall Street is interested in strong revenue growth and a reasonable valuation but Spotify is giving none of that. Though it put out a good (but not great) Q1 earnings report, investors are still not sold on its long term value and its continued spending in non-music segments. And they showed this with the stock dipping 32.7% after the earnings call.
In 2018, the company’s objective was to expand gross margins to 30-35% but these margins have been stuck to roughly 25% ever since and we all know weak margins means weak profits or no profits at all. Spotify is far from reaching their goals and it keeps getting rocky every minute.
Before podcasts became a huge part of the company, Spotify added 5% – 10% active monthly users but now, its user growth rate has fallen below 5% in the past 4 quarters out of 5. Without this new growth, investors are losing patience with this streaming leader.
No doubt, Spotify now has more big podcast names on its roster – 4 million podcasts is a big deal but these are clearly not translating to the type of profits Wall Street expects. Analysts are even calling for the company to go private or put itself up for sale.
However, if you still believe in Spotify you’re not the only one. The company’s CEO, Daniel Ek, recently bought $50m of Spotify shares. I guess he’s putting his money where his ears are.
This leads us to the question, what model can Spotify adopt to generate profits? What do you think? Talk to us in the comment section.
