What a difference six months makes.
At the top of the year, anytime you heard Spotify's (SPOT) name podcaster Joe Rogan's name wasn't far behind. Spending a reported $200 million on the world's most popular podcaster may do that to a brand.
Rogan, who apologized for spreading vaccine misinformation on his podcast, also expressed regret for his use of the N-word, which was uncovered in an Instagram post by the singer-songwriter India Arie.
“While I strongly condemn what Joe has said and I agree with his decision to remove past episodes from our platform, I realize some will want more,” Elk said in a letter to employees. "I want to make one point very clear: I do not believe that silencing Joe is the answer.
Spotify has recently acquired Megaphone (2020) for a reported $235 million; the Ringer (2020) for reports of about $200 million; Spotify confirmed that it paid €300 million ($340 million at the time) for Gimlet and Anchor (2019).
Spotify has spent over $834 million on acquisitions, according to research company Tracxn.
Add in the money the company has spent on personalities like the Obamas, Meghan Markle and Prince Harry, and Rogan, Spotify has spent more than $1 billion on podcasts recently to bolster that side of the business.
The company brought in "close to" €200 million ($215 million) in podcast revenue in 2021, Chief Content Officer Dawn Ostroff said at the company's investor day presentation in early June, according to the Hollywood Reporter.
Despite the nine-figure revenue, CFO Paul Vogel also said that podcasting had a €103 million ($110 million) impact on gross profit and is expected to remain negative this year.
Spotify's Path to Profitability
Wells Fargo's research team has been pessimistic about Spotify's margin trajectory in 2022, but the company's recent comments on its bottom line has the firm raising its rating to equal weight and increasing its price target to $124 from $101 per share.
The company has a feasible plan for margin expansion over the next few years, according to Wells.
"SPOT's recent investor day laid out a more profitable company than we have modeled historically. Should we believe them? Given the strength in user and revenue growth we're willing to concede some margin expansion opportunity, and give management time to execute," analyst Steven Cahall said.
Podcast gross margins are expected to climb way faster than Wells analysts previously expected. The firm expected Spotify's podcast margins to just break even by 2025, but the firm is rethinking its stance after the company modeled for margins greater than 25% by that time.
Spotify management sees gross profit operating leverage in music growing 75 basis points on average due to its Marketplace initiative, which is a program that has artists pay Spotify to promote their music on the platform.
"Following its June 2022 investor day, we gain more compelling insights into SPOT's operating leverage. The company believes operating margin of ~10% are ~5 years out, as gross margins in both music and podcasting will benefit from investments that drive engagement and monetization," Cahall said.
"We've never doubted SPOT's user and revenue growth, so we can be convinced of a stronger margin inflection."
Spotify's Rocky Ride
Joe Rogan was never Spotify's biggest problem, only its most visible one.
“Sure, Spotify is the world leader in streaming music subscriptions," Real Money columnist Paul Price recently wrote. "But SPOT has never come close to turning a profit so far. "
"The wild equity market environment of the past few years saw many stocks with negative EPS trade actively in both directions. Short-term traders love volatile shares simply for the opportunities to gamble on them," Price wrote.
"What do you base your buys and sells on? Who knows? Trading can be fun and addictive even if it makes no sense and has no rationality to it. SPOT's average daily volume of about 2.9 million shares is quite impressive for such a high-priced stock."
Spotify shares were up 6.91% to $104.83 at last check Wednesday afternoon.
