Spotify Shares Surge on Better-Than-Expected Profit Forecast

Spotify's shares rose in extended trading on Tuesday after the music streaming company issued a profit forecast for the fourth quarter that topped estimates. The Swedish company's earnings and revenue for the third quarter trailed estimates, but investors focused on the guidance for the current period.

Spotify expects operating income in the fourth quarter to come in at €481 million, exceeding the average analyst estimate of €432.7 million, according to StreetAccount. Monthly active users (MAUs) will increase to 665 million, while analysts were expecting 659.3 million. The company's subscriber base, particularly its premium subscribers, grew by 12% year-over-year to 252 million, slightly ahead of estimates.

However, revenue guidance trailed estimates. The company said sales will reach €4.1 billion, below the average analyst estimate of €4.26 billion, according to LSEG. This was driven by a less-than-expected 19% increase in revenue to €3.99 billion in Q3, missing estimates of €4.02 billion, due to weakness in the digital advertising market and a strong U.S. dollar.

Spotify's cost-cutting measures, such as layoffs and podcast pullbacks, have contributed to its improved profit forecast. In 2023, the company laid off 17% of its workforce, totaling over 1,500 people, and pulled back on podcasts to boost profitability. These measures, along with price increases for its premium plans, have helped Spotify achieve a 40% increase in gross profit margin, reaching 31.1% in Q3 2023. Additionally, Spotify's operating income in Q4 2023 is expected to be €481 million, exceeding analyst estimates by 10.7%.



Spotify's subscriber growth can be attributed to its strategic expansion of premium features and AI tools. In Q4 2023, the company added 10 million net additions, reaching a record full-year net addition of 31 million. This growth was driven by the addition of 28 million MAUs and 15% Y/Y growth in subscribers. Spotify's expansion of premium features, such as the introduction of audiobooks and the expansion of its playlist creation tool using generative AI to four new markets, including the U.S., has helped attract and retain users. Additionally, the company's cost-cutting measures and price increases in the U.S. have contributed to its profitability.

In conclusion, Spotify's shares popped on better-than-expected profit forecasts, driven by strong subscriber growth and improved profitability due to cost-cutting measures. Despite a less-than-expected revenue increase in Q3, the company's guidance for the fourth quarter indicates a positive outlook for the music streaming giant. Investors should monitor Spotify's progress in expanding premium features and AI tools, as well as its ability to navigate currency exchange rates and the digital advertising market.