Spotify, more efficiency and operational speed to pace the margins

These numbers are increasing compared to the past (26% Gross margin in 2023 and 25% in 2022) and are the consequence of a mix of reasons. Causes about which, before being analysed, it is useful to recall Spotify's business model. The multinational streaming music company divides its revenues into two areas. The first, the most relevant, is the paid subscription (premium segment) offering various services without advertising: from music to audiobooks to podcasts. This was worth 88% of turnover at the end of last year. The second - the Ad-Supported segment - consists of users who do not subscribe but are exposed to audio, video and display advertising (12% of turnover).

Well: the gross margin of the premium segment increased to 33% in 2024. The increase is, first of all, the effect of the higher expansion of revenues compared to the costs of music royalties (paid to record companies) and audio-book licences. In addition, some markeplace-related programmes have benefited. That is: the ecosystem where, for example, on the one hand the artist promotes his or her music, increasing visibility; and on the other hand Spotify - by diversifying revenues - reduces dependence on the record companies themselves. Finally, it has helped operational efficiency. On the Ad-supported side, the industry margin has even increased from 4 (2023) to 12% (2024).

Here, however, apart from the reduction in the production of podcasts, the periods are not comparable with each other, since - two years ago - charges for the reorganisation and realignment of the business were accounted for. In the final analysis, therefore, from the point of view of the consolidated gross margin it is important to emphasise the contribution especially of the premium segment, where ultimately the cost of sales (to which royalties for record companies and licences on audio-books are attributable) ran lower than revenues.

Yes, revenues. Turnover, in fact, went up. But, here again, what are the reasons? The trend, in the premium sector, is essentially the effect of the increase in subscribers and the average turnover per subscriber (Arpu). The former, according to experts, have increased in the wake of - among other things - promotions to attract users to the premium version, diversified subscriptions (Family and Duo Plans) and penetration in emerging markets. Arpu (EUR 4.69 in 2024), for its part, also benefited from upward price adjustments. Ubs points out that Spotify was the only industry player to list in the US. Despite this, subscribers have increased. A sign, says the investment bank, that Spotify's business model and positioning is correct. With reference, on the other hand, to the Ad-supported area, the increase in revenues (although not strong) is a consequence, first of all, of the higher 'engagement' of content users (which has allowed the increase in the number of ads shown and sold). Not only that. The direct channel (sales directly to advertisers) and the automated auction channel played their role. Finally, the self-service advertising platform for SMEs was important.

That said, is everything as easy as drinking a glass of water? The reality is more complicated. The group gave its guidance for the first quarter of 2025. Among other numbers, it indicated that it expects a Gross margin of 31.5%. That is to say: the indicator is lower than in the last quarter. Some experts, faced with such a forecast, turned up their noses. So much so that, during the conference call, they were even asked whether there was not the dilutive effect of the recent agreement with Universal Music Group. The company, denying comments on the agreement with the major with respect to margins, replied that the main cause of the Gross margin trend is seasonality. Then it emphasised the important investments in video, which - inevitably - squeeze the margin. Finally, he emphasised how the indicator, on the one hand, will be more variable in the current financial year; and that, on the other hand, at the end of the year it will still be higher than in 2024.

But it is not only a question of Gross Margin. Also with reference to the current quarter, analysts pointed out the slowdown of the expected increase in new subscribers (only 2 million). A problem? Spotify, reiterating the seasonal weakness of the period between January and March, first said that when there are higher than expected results (such as those in the fourth quarter) the subsequent numbers are always softer. Then: he explained that a lot also depends on the marketing strategy during the year. Yes, the year. Another front of doubts - according to some experts and always regarding future growth - is the price lever. That is to say: the risk is that - even in the face of competition - there may not be so much room for price increases. The objection - evidently not shared by Spotify - is opposed by Ubs itself. The investment bank predicts that the potential global market for paid music streaming could reach 922 million users in 2028 (in 2024 an estimated 722 million), with a Cagr 2023-2028 of 6.7 per cent. Not only that. In the US, consumers will add an extra $3 on premium music. In the end, therefore, the room for manoeuvre should be there. Against this background, what is Spotify's situation on the stock market? The company, per the Bloomberg terminal and as of 13/2/2025, has a P/e on 2024 of 76.3 times. The multiple is high and - according to SeekingAlpha - other indicators such as Ev/sales or Ev/Ebitda are also higher than those of the sector. The do-it-yourselfer, therefore, should handle the stock with great, great caution.