Spotify Finally Singing a Different Tune

Spotify Technology has learned a new song: “Ka-Ching!” 

Barron's reports after years of losses, the audio streamer, which went public at $132 a share in 2018, is in the black. Spotify even surprised analysts, most of whom projected an operating loss. Its shares rose 15% on the week, to $291.

Spotify’s problem has always been that it pays most of its revenue back to music labels, whose concentrated ownership of popular song catalogs gives them leverage. But Spotify has added nonlabel content like podcasts and drawn in more listeners. In the third quarter, the company reported a two million euro ($2.3 million) profit, on €2.5 billion in revenue. On a per-share basis, Spotify lost 48 cents, largely because of changes in the value of warrants and exchangeable notes that fluctuate with the shares, which it can’t control.

Spotify’s user growth rebounded after a weak 2021 start. Monthly active users and premium subscribers both rose 19%, year over year, to 381 million and 172 million, respectively. Gains could accelerate in the fourth quarter; Spotify expects monthly users to climb to 400 million to 407 million.

The most promising sign: podcasts and better targeting drove ad revenue up 75%, year over year. The gross margin, which had hung around 25%, hit 26.7% in the quarter, up nearly two percentage points in the past year. Spotify also raised prices, boosting margins on premium subs to 29.1%. The result: €75 million in operating income, versus a loss of €40 million a year ago.