Can Spotify ever hope to regain its original market valuation?
Despite reaching 87 million users at the end of the third fiscal quarter of 2018, Spotify has been experiencing some turbulence.
First, major executives keep jumping ship.
Despite enjoying comfortably high salaries, they seem to be fleeing the streaming music giant. So far this year, the company has lost Angela Watts, Dave Rocco, Mark Williams, Jackie Jantos, Seth Farbman, Graham James, Jorge Espinel, Rocío Guerrero, Doug Ford, and Troy Carter.
Second, the company has lost three crucial markets to Apple Music – the US, Canada, and Japan. Apple Music continues to gain the upper hand, beefing up its Beats Radio and TV offerings. The service also has a higher subscriber conversion rate, nearly three times more than the European streaming music platform.
Third, Spotify continues to recklessly burn money.
Last year, the company agreed to pay $566 million for a lease agreement that runs until 2034. Earlier this year, the streaming music giant exercised an option, slightly increasing its office space and adding $80.4 million to the life of the lease. Add that to luxurious – i.e., unnecessarily costly – office spaces in Stockholm and Dubai, among many others.
Now, with no clear game plan to achieve profitability, investors are starting to punish the company’s shares.
Earlier this year, when Spotify finally went public, the stock reached a valuation of $26.5 billion. That valuation quickly soared past $35 billion.
Unfortunately, the company’s core financials have been suffering.
In its Q1 2018 report, the company posted an operating loss of $49 million, roughly 4% of its total revenue. Advertising revenue also dropped 22% that fiscal quarter. Q2 2018 wasn’t any better. Operating loss grew to $105 million, and the company’s total deficit reached $584 million. Its cash reserves stood at just $2 billion.
Then, for Q3 2018, the streaming music giant revealed a glimmer of hope – after ten years, it had finally turned a profit, reaching $49 million. But, that was only due to a one-time investment swap in Tencent Music.
At the end of its report, company executives revealed the bad news – expect lower average revenue per user (ARPU), weaker monthly active user growth, and a slowdown in total revenue.
Despite revealing a $1 billion stock buyback plan and having the recommendation of Goldman Sachs and eleven other investment firms, Spotify’s stock has just reached a new low.
Shares have dipped to $130.61, down more than 5% from its opening price of $136.84. Earlier this morning, stocks reached $126.75, a historic low for the company.
One explanation is that the Dow Jones has also gone down. But the broader market has been recovering of late, while Spotify has remained down.
Now, there are signs that analysts and investment banks could be losing confidence in SPOT.
Zacks Investment Research has recently downgraded shares of Spotify from Buy to Hold. JPMorgan Chase has lowered the company’s price target from $225 to $200. Evercore ISI also downgraded the stock along with its price target, from $210 to $155.
What do they see? The downgrades suggest some serious rethinking of Spotify’s deep levels of debt-financed growth. Amidst reckless spending on salaries and overhead, Spotify has clearly failed to provide investors a viable path to profitability.
In short, no matter how big Spotify grows, it’s difficult to imagine a strongly profitable future.
The bigger question remains. Should we expect the company’s shares to dip below $100?
Featured image in the Public Domain.