At the close of 2022, Spotify Technology S.A. (NYSE: SPOT) was grappling with a massive downturn, with its stock trading below $80 per share. The company had suffered a loss of over $35 billion in market capitalization, leaving investors with significant concerns. Fast forward to today, and Spotify has staged a dramatic comeback, with shares trading just shy of $500 and its market cap soaring to $100 billion—up from a mere $15 billion two years ago.
A Record-Breaking Year
Spotify is now on track to achieve full-year profitability for the first time in its history. The company’s remarkable stock surge stems from a comprehensive business overhaul, which has included workforce reductions, strategic shifts, and leadership changes.
At its 2022 Investor Day, Spotify set ambitious long-term gross margin targets between 30% and 35%, a stark contrast to the then-struggling 25% margin. In its latest quarterly report, the company revealed its gross margin had climbed to 31.1%, surpassing expectations and solidifying its progress.
CEO Daniel Ek celebrated the success during Spotify’s Q3 2023 earnings call, stating, “We’ve never been in a stronger position… We are where we set out to be, if not a little further.”
Wall Street Confidence
Wall Street analysts share the optimism, with a median price target of approximately $486 per share, supported by 29 Buy ratings, eight Hold ratings, and only three Sell ratings, according to Bloomberg’s consensus estimates.
A Shift in Strategy
Spotify’s journey to recovery began with a bold pivot away from the spending spree of the pandemic era. Between 2019 and 2021, the company invested heavily in podcasts, acquiring high-profile content and studios for nearly $1 billion. High-profile deals included the Obamas, Joe Rogan, and Kim Kardashian, as well as acquisitions like Gimlet Media and The Ringer.
However, this aggressive approach raised concerns about profitability, especially as Spotify faced stiff competition from tech giants like Amazon, Apple, and Alphabet. The company was burdened by high content costs and a soft advertising market, leaving investors skeptical about its long-term viability.
Turning the Tide
In 2023, Spotify began a transformation aimed at improving efficiency and profitability. Key changes included restructuring its podcast strategy, combating streaming fraud with new royalty policies, and adjusting its vast music catalog in response to generative AI.
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The most impactful shifts came in two forms:
- Price Hikes: In mid-2023, Spotify implemented broad price increases across 70% of its revenue-generating markets—the largest in its history.
- Cost Cutting: The company laid off 17% of its workforce, or approximately 1,500 employees, in December 2023, following earlier layoffs of 800 staff. These measures are expected to save €300 million ($315 million) annually.
Morgan Stanley analyst Ben Swinburne highlighted these moves, saying, “The dual effect of faster revenue growth combined with reduced expenses has set Spotify up for a rapidly improving profit profile in 2024.”
Expanding Beyond Music
Spotify’s evolution continues with its foray into audiobooks. In 2024, the company introduced an audio bundle that includes music, podcasts, and audiobooks, alongside standalone audiobook and music plans. These offerings have enabled Spotify to implement a second round of price hikes in under a year without increasing user churn.
The bundle strategy has not only added value for consumers but also enhanced the company’s margins. Spotify’s gross margin, which already met its long-term goal of 30%-35%, is expected to rise further to 31.8% in the fourth quarter.
A Strong Future
Spotify’s focus on innovation, combined with disciplined cost management, has positioned it as a leader in the audio streaming industry. Its ability to retain users despite higher prices and offer compelling new products underscores its resilience and growth potential.
“We’re well on our way to becoming not just a great product but a great business,” CEO Daniel Ek said, summarizing Spotify’s remarkable turnaround. With user engagement at an all-time high and a strengthened financial position, Spotify is charting a path for sustained success.