How Spotify Stock Lost Its Mojo

How Spotify Stock Lost Its Mojo
Cheyne Gateley/VIP+

When Spotify announced Wednesday its exclusive deal with World Wrestling Entertainment to develop new original audio content, it was just one of many exclusive content deals the platform has signed with top talent over the past year or so.  

However, after surging 110% last year, shares of the streaming audio company’s stock have quickly fallen back to Earth. So far in 2021, Spotify stock was down around 33%, while the broader market rose 20% during the same time period. While it is still hovering around $200 per share, the stock sank 46% after hitting an all-time intraday high of $387.44 in late February. 

Exactly one year ago, VIP+ analyzed Spotify’s eye-popping rally in 2020 and called into question whether the stock had more room to run ahead. And the reason for such doubt was because of two key looming questions. First, was the bullish narrative surrounding exclusive podcast deals and a COVID pull-forward effect the impetus for such a massive stock surge? Second, would the exclusive podcast strategy drive substantial subscription and ad-supported revenue in the long term? 

The deals with big names were meant to drive users to Spotify’s platform, which would then ultimately drive topline growth through recurring revenue with subscriptions or with ad revenue driven by users of the free version. 

One of the most sizable deals of late was Joe Rogan's $100 million exclusive licensing deal with Spotify, which made his entire catalog of podcasts available to listeners of both the free ad-supported service and Spotify Premium.  

While we don’t know how much of a financial impact it has made on the company, Spotify did say in its latest Q2 earnings report that the strength in its ad-supported revenue was thanks in part to contributions including the exclusive deal with Rogan. Ad revenue is the second-biggest driver of revenue for the company. 

So far, it looks like CEO Daniel Ek’s podcast strategy is working. Spotify reported that podcast share of overall consumption hours jumped 95% in aggregate, hitting an all-time high in Q2. Also, among monthly active users (MAUs) that engaged with podcasts, listening was up more than 30% from last year on a per-user basis.  

On the earnings conference call at the end of July, Ek said the company will push forward with its exclusive deal strategy as it looks to lure more listeners to Spotify. 

In addition, the strong rebound in the advertising market this year has been remarkable, and Spotify has been the main beneficiary of that in the streaming audio space. The company reported ad revenue soared 110% from last year.  

So what’s the matter with Spotify’s stock? 

The most important metric investors and Wall Street analyzes is user engagement and growth. Since Spotify’s public debut in early April 2018, user growth has maintained its positive uptrend; however, the company’s outlook for the future isn’t quite as rosy as it once was. 

MAU growth went from 29% in 2018 to 31% in 2019 and 27% in 2020. Now management has guided that it expects just about 17% MAU growth in 2021. Spotify’s two consecutive quarters of weaker-than-expected user growth guidance has investors bracing for further deceleration of engagement and penetration despite its most noble efforts. Whether it’s the tech sector or the media sector, all investors care about these days is growth. 

If fewer listeners visit the platform, then subscription revenue and ad revenue are both negatively impacted. While user growth is still steadily increasing, it hasn’t been quite as substantial considering the amount of cash being spent on exclusive deals. Part of that is likely due to a pull-forward effect caused by COVID, and another part could be that Spotify isn’t exactly monetizing effectively. 

Ek admitted ad revenue is growing in importance at Spotify but he hasn’t focused as much on it as he should. Spotify has all the pieces in place, but it’s about execution going forward. If Ek can successfully execute his long-term podcast and advertising strategies, investors can expect to see meaningful gross margin expansion, which could drive the stock higher, too.