Even though Spotify (SPOT, Financial) reported slightly fewer monthly active users (MAUs) than expected in Q2, investors are still enthusiastic, pushing shares to three-year highs. Highlights included a third consecutive quarter of profitability, strong revenue growth, and solid subscriber net adds. MAUs grew 1.8% sequentially to 626 million, despite missing projections.
SPOT has surged over 70% YTD, driven by its swift transition to profitability. Price hikes have not significantly impacted MAU or premium subscriber growth. Notably, SPOT's recent price hikes in key markets have led to less churn compared to last year, showcasing its competitive edge in the streaming industry.
- SPOT's "year of monetization" is progressing well, with positive EPS of €1.33 on revenues of €3.81 billion, a 19.8% year-over-year increase. Subscriber net adds exceeded guidance by 1 million, reaching 7 million in the quarter. Total premium subscribers grew 12% year-over-year to 246 million, surpassing the 245 million forecast.
- Why did MAUs fall short? The miss is due to SPOT's handling of different markets. Developed markets, with users more financially capable, anchor its paid subscription business. In contrast, its ad-supported business focuses on developing markets, aiming to convert users to paid subscriptions over a longer time horizon.
- This market dichotomy creates challenges each quarter. In developing regions, conversion to paid subscriptions is slower, making it harder to achieve the same ROI from marketing initiatives as in developed countries.
- To address this, SPOT is improving its marketing impact and enhancing its free product pipeline to boost engagement. Management is confident in these strategies and believes they will be effective over the coming quarters.
Despite the MAU miss, SPOT's history suggests that converting free users to paid subscriptions is a matter of when, not if. While these efforts may not yield immediate results, investors are willing to overlook potential risks, given SPOT's continued profitability.
