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Should You Buy Spotify (SPOT) Stock After Q3 Earnings?

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Shares of Spotify (SPOT - Free Report) plummeted over 6% through afternoon trading Thursday after the streaming music firm reported its third-quarter financial results. Spotify posted its first-ever profit but also lowered its subscriber outlook.

Q3 In Detail

Spotify, which went public in early April, posted a quarterly profit of €43 million, compared to a loss of €278 million in the year-ago period. The firm was, however, boosted by a €125 million tax benefit related to its investment in Tencent Music. Unfortunately for investors, Spotify said it expects to return to a loss.

With that said, Wall Street and most investors likely cared little about Spotify’s profit at the moment as subscriber growth will remain key for the foreseeable future. The streaming firm’s ability to attract new customers is even more paramount as tech giants Apple (AAPL - Free Report) , Amazon (AMZN - Free Report) , and Google (GOOGL - Free Report) all offer similar services. 

Spotify’s premium subscribers soared 40% from the year-ago quarter’s 62 million to reach 87 million in Q3. The company also added 4 million new premium users sequentially. Meanwhile, the company’s ad-supported monthly active user total popped 20% from 91 million to 109 million. The company closed the quarter with a total of 191 million monthly active users.

Spotify’s ad-supported users outnumber its premium subscribers, but its paid tier accounted for roughly 90% of third-quarter revenues. Spotify’s total Q3 revenues jumped 31% to €1.352 billion, while premium revenue surged at the same rate to €1.210 billion. SPOT’s total quarterly revenues came in closer to the high-end of its guidance, which called for between €1.2 and €1.4 billion.

 

Q3 Worries

The Stockholm-based company’s revenue growth was solid, but investors should note that its average revenue per user sunk 6% from the-ago quarter to €4.73. Spotify did see its ARPU drop 12% year-over-year last quarter and it noted that this figure has declined based on the success of its family and student plans. Still, ARPU figures are a trend to keep an eye on.

Spotify also lowered the high-end of its Q4 subscriber guidance. The company now projects its MAUs will climb as high as 29% to between 199 and 206 million, instead of 199 million to 207 million.

Outlook

Looking ahead, Spotify expects its Q4 premium subscribers to climb between 30% and 36% to reach 93 million to 96 million. Meanwhile, total fourth-quarter revenues are projected to jump between 18% to 35% to hit €1.35-€1.55 billion.

In an effort to attract more subscribers, Spotify just announced a partnership with Google to offer free Google Home Mini speakers to Family plan master account holders in the U.S. during the holiday season. It is also worth remembering that Spotify and Samsung announced in August a partnership that makes the firm Samsung's “new go-to music service provider.”

The move came shortly after Verizon (VZ - Free Report) partnered with Apple to give its “Unlimited” customers free access to Apple Music for six months.

Bottom Line

Spotify has been called the next Netflix (NFLX - Free Report) . Yet, aside from the fact that they are both massively popular streaming platforms, they have little in common.  

Unlike, Netflix and its competition against Amazon, Hulu, and soon enough Disney (DIS - Free Report) , Apple, and AT&T (T - Free Report) , Spotify does not offer anything particularly unique. It offers, for the most part, the exact same music library as Apple Music and other premium streaming platforms. This is also the reason why Spotify, unlike Netflix, will likely always be beholden to record labels.

Therefore, despite its gigantic user base, it seems like Spotify stock might simply be a stock to keep an eye on for now.

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