Spotify Q1 earnings: What’s boosting investor sentiment

Yahoo Finance’s Allie Canal joins the Live show to discuss quarterly key takeaways from Spotify earnings.

Video transcript

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- Time now for our Chart of the Day. Today we're looking at the streaming business, focusing on audio. Spotify and other audio streaming platforms grew subscribers rapidly during the pandemic as people were encouraged to stay at home. Now, that drove the demand for content, resulting in more than a 20% increase in paid music subscriptions from 2020 to 2022. However, investors are now concerned that we're near the point where everyone who could be paying to stream music already is.

Well, to that point, Spotify reported mixed results this morning. But investors are still rewarding the company, with shares up about 6% right now. Here to tell us what's boosting sentiment is Alexandra Canal. So, Allie, you also listened to the earnings call. What did you learn?

ALLIE CANCAL: Hi, Rachelle. Well, the main takeaway for me is that Spotify is delivering on its promises, at least so far. Despite-- excuse me-- despite that miss on revenue, a wider-than-expected loss, the company did beat expectations on margins and also continued to crush subscribers.

If we take a look at monthly active users, that was very impressive, coming in at 515 million, beating expectations of 502 million. Premium subscribers also outpaced estimates, at 210 million versus the expected 207 million. And looking ahead to the current quarter, Spotify does expect to report MUAs of 530 million, with premium subs expected to reach 217 million. So just insane numbers right there.

But going back to those margins, this was a story that goes back to 2022, where investors were increasingly disappointed at Spotify's margins, especially after the company heavily invested in podcast. Yet management had maintained that the company will be much stricter on spending in 2023 and that investors will see sequential margin improvements, which we have seen so far, with margins coming in at 25.2%, beating estimates of 24.9%.

Another takeaway here is the ad market. That pressured revenue in the quarter, with CFO Paul Vogel telling investors the quarter was choppy again. He said they're cautiously optimistic moving forward. But, quote, "We feel really good about our relative position in the ad market and how we performed."

Finally, when it comes to pricing, analysts expect the company to hike subscription fees in the coming months, especially amid that profitability push. But it did not happen today. Still, Ek said that he was willing to raise prices when the time is right. Here's a little bit more of what he had to say on that earnings call.

DANIEL EK: So we have many tools at our disposal as we're thinking about how to increase growth. And the industry realizes that. And our label partners realizes that as well. So that's the constant dialogue that we're in. But yeah, we would like to raise prices in 2023. But it's really a discussion with our partners.

ALLIE CANCAL: So hinting that those price increases could come at some point this year. But, again, as Ek said, it's all going to depend on negotiations with those label partners. So for all of these reasons, I'm getting a positive vibe check when it comes to Spotify earnings, primarily driven by that margin beat, the fact that management did reiterate that they are going to continue to be very careful about their spending. They're going to be looking at all of their content investments to make sure that they're not overspending.

And this is surprising to me because if you told me this time at the end of last year that I would be giving a positive vibe check to Spotify earnings, I wouldn't have believed you because they were a company that really struggled with that. But it does seem to be that they are on this path and on this strategy of speed and efficiency. And that's why we're seeing this bullishness both on the Street and in the stock today.

- Well, certainly seeing that more strategic aspect paying off in that stock price there, Allie Canal. Thank you for that update.