Spotify And The Importance of Long-Term Thinking

On March 31, 2023, I wrote the Spotify spotlight article. The thesis was simple. Spotify’s strategy to “own your ears” could be a winner-take-all market and Spotify was one of only a few logical winners in the space and the only one focused on audio-only.

Shares have been on a wild ride since, up 30% at one point and then cratering after earnings. In the Asymmetric Portfolio, the stock is up a little over 9% and is beating the market but that position was a loss just a few weeks ago. Today, I want to revisit Spotify's recent news and reinforce why the short-term price action is noise for Asymmetric Investors focusing on finding 10x stocks.

Spotify’s Progress and Competition

The focus of analyzing any stock should be the long-term trajectory the business is taking, not whether or not it beat/missed Wall Street’s guess at earnings. On that note, there have been a few notable changes at Spotify in the last six months that point the company in the right direction strategically.

• User growth was much stronger than expected in the most recent quarter.

  • Ad-supported MAUs jumped 8% Q/Q and 34% Y/Y to 343 million in Q2 2023.

  • Premium MAUs jumped 5% Q/Q and 17% Y/Y to 220 million in Q2 2023.

• Price increases were announced in July and are expected to impact revenue in Q4 2023.

  • U.S. subscriptions will increase from $9.99 per month to $10.99 per month.

  • Duo will increase from $12.99 to $14.99.

  • Family will increase from $15.99 to $16.99.

• Cost cuts have been announced including these items:

  • Cut real estate footprint.

  • Cut expensive podcast contracts with Meghan and Harry and the Obamas.

  • Lowered headcount.

Increasing the top of the funnel, pushing prices higher, and containing operating costs are all signs that Spotify’s strategy is moving in the right direction. But financial progress will take much longer. The company isn’t expecting price increases to impact the business until Q4 and the strategy change in podcasts to focus on fewer exclusives and grow advertising will take years to take hold. Cost cuts are even more complicated because if European labor laws, which will delay the impact of layoffs.

What’s important as a long-term investor is to highlight the most important operating metrics are improving and they’re improving faster than anyone expected.

How Spotify Emerges a Winner

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