Spotify Made a Surprise Profit. Price Increases Aren’t Putting Off Subscribers.

The company was expected to report a loss of 22 European cents a share on sales of €3.33 billion, according to a FactSet poll of analysts.  

Spotify has never made an annual profit so even one profitable quarter is a highlight, although the positive numbers won’t do much more than partially offset the losses in earlier quarters this year.

The streaming platform has raised prices for its premium subscriptions and laid off hundreds of employees since January.

In morning trading, Spotify’s U.S.-listed stock was up 11%—on track for its biggest increase since the start of the year.

The company’s major challenge is still to convince the market that it can achieve its long-term gross margin goal of between 30% and 35%. Spotify’s third-quarter gross margin stood at 26.4%, broadly in line with its guidance. 

Spotify executives said they expect gross margins to keep improving in 2024, despite investment in the company’s audiobook business.

Truist Securities analyst Matthew Thornton wrote that Spotify’s results were “solid” across its key indicators, noting the beats on gross margin and operating profit.

In recent weeks some analysts have turned skeptical on the stock’s chances of continuing its stellar run. However, Truist’s Thornton kept a Buy rating and $176 target price on the stock.

Spotify said its monthly active users rose to 574 million for the quarter and premium subscribers came to 226 million, both ahead of its guidance and consensus expectations. The company added 6 million premium subscribers in the quarter; the expectation was 4 million.

Average revenue per user from Spotify’s premium subscribers was down 1% from the same period a year earlier, adjusted for currency. The company said this was due to shifts in what products premium subscribers were paying for and which markets they were in.

Spotify said that for the fourth quarter it expects an operating profit of €37 million on revenue of €3.7 billion, with a gross margin of 26.6%, It expects monthly active users to rise to 601 million and premium subscribers to climb to 235 million.

Spotify’s challenge is to show it can keep increasing users while improving financial returns and successfully negotiating music-rights deals, wrote Pivotal Research Group analyst Jeffrey Wlodarczak in a research note.

“This is especially important given the concentrated power of the music labels (that arguably may allow them to leech most of Spotify’s potential margin for the foreseeable future) and to lesser extent the emergence of new competitors (such as TikTok Music),” Wlodarczak said.

The analyst raised his target price to $170 from $140 and kept his Hold rating.

Write to Adam Clark at [email protected]