Spotify has a plan to increase margins, will it work?

What a difference six months makes.

At the top of the year, every time you’ve heard Spotify (PLACE) – Get the Spotify Technology SA report Podcaster Joe Rogan’s name was not far behind. Spending $200 million on the world’s most popular podcaster can do that for a brand.

Rogan, who apologized for spreading misinformation about vaccines on his podcast, also expressed regret over his use of the N-word, which was discovered in an Instagram post by singer-songwriter India Arie.

“While I strongly condemn what Joe said and agree with his decision to remove past episodes from our platform, I realize some will want more,” Elk said in a letter to employees. “I want to make one point clear: I don’t think silencing Joe is the solution.

Spotify recently acquired Megaphone (2020) for $235 million; the Ringer (2020) for reports around $200 million; Spotify confirmed they paid €300 million ($340 million at the time) for Gimlet and Anchor (2019).

Spotify has spent more than $834 million on acquisitions, according to research firm Tracxn.

Add to that the money the company has spent on the likes of the Obamas, Meghan Markle and Prince Harry, and Rogan, Spotify recently spent over a billion dollars on podcasts to bolster that side of the business. .

The company brought in “nearly” 200 million euros ($215 million) in podcast revenue in 2021, chief content officer Dawn Ostroff said during the company’s Investor Day presentation in early June, according to the Hollywood Reporter.

Despite posting nine-figure revenue, chief financial officer Paul Vogel also said podcasting had a €103 million ($110 million) impact on gross profit and is expected to remain negative this year.

Spotify’s path to profitability

Wells Fargo’s research team has been pessimistic about Spotify’s margin trajectory in 2022, but the company’s recent comments on its bottom line have caused the company to raise its rating to equal weight and increase its price target at $124 versus $101 per share.

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The company has a workable plan for expanding margins over the next few years, according to Wells.

“The recent SPOT Investor Day presented a more profitable business than we have historically modeled. Should we believe them? Given the strength of user and revenue growth, we are ready to concede an opportunity to ‘expanding margins and giving management time to execute,’ analyst Steven Cahall said.

Podcast gross margins are expected to climb much faster than Wells analysts had expected. The company expected Spotify’s podcast margins to break even by 2025, but the company is rethinking its position after the company modeled margins above 25% in that time.

Spotify management sees gross profit operating leverage in music increase by 75 basis points on average thanks to its Marketplace initiative, which is a program that allows artists to pay Spotify to promote their music on the platform .

“Following its June 2022 Investor Day, we are getting more compelling insights into SPOT’s operating leverage. Raw in music and podcasting will benefit from investments that drive engagement and monetization,” Cahall said.

“We have never doubted SPOT’s user and revenue growth, so we can be confident of a stronger margin inflection.”

Spotify’s Rocky Ride

Joe Rogan has never been Spotify’s biggest problem, only its most visible.

“Of course, Spotify is the world leader in streaming music subscriptions,” Real Money columnist Paul Price wrote recently. “But SPOT has never come close to making a profit until now.”

“The wild stock market environment of the past few years has seen many stocks with negative EPS actively trading back and forth. Short-term traders like volatile stocks simply for the opportunities to bet on them,” wrote Price.

“What do you base your buys and sells on? Who knows? Trading can be fun and addictive even though it makes no sense and has no rationality. SPOT’s average daily volume of around 2.9 million shares is quite impressive for such a high-priced stock.”

Spotify shares rose 6.91% to $104.83 when last checked on Wednesday afternoon.

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