Examining the Road Ahead for Spotify (SPOT) After CFO Departure and Sell-Off

Spotify Technology S.A. (SPOT) recently announced that its CFO, Paul Vogel, will step down from his position after eight years of service at the music streaming giant. Vogel, who joined Spotify in 2016 as head of investor relations before taking over the CFO role in 2020, will exit on March 31, 2024. This news came just days after the company announced its third round of layoffs for 2023.

Spotify has embarked on an evolution over the last two years to bring our spending more in line with market expectations while also funding the significant growth opportunities we continue to identify. I’ve talked a lot with Paul about the need to balance these two objectives carefully. Over time, we’ve come to the conclusion that Spotify is entering a new phase and needs a CFO with a different mix of experiences,” SPOT’s CEO Daniel Ek said in a release announcing Vogel’s exit.

In the announcement, Ek reiterated that the company remains on track to deliver against the targets outlined on its Investor Day.

The music streaming company launched an external search for Vogel’s successor. Ben Kung, vice president of financial planning and analysis, will take on expanded responsibilities to support the company’s financial leadership team’s realignment in the interim.

Organizational Changes

Earlier this month, SPOT announced laying off 17% of its workforce, aiming to lower its costs while focusing on its profitability.

In an email sent to employees posted on the company’s blog, Spotify’s CEO said that the job cuts are part of a “strategic reorientation.” The post didn’t specify the exact number of roles affected by the measure, but a spokesperson confirmed that it amounts to nearly 1,500 people.

The company added that it had used cheap financing to expand the business and “invested significantly” in employees, content, and marketing over the years 2020 and 2021. However, Ek indicated that Spotify got caught out as central banks began hiking interest rates last year, leading to slow economic growth. The music streaming service had to “rightsize” its costs for a new economic reality.

“Over the last two years, we’ve put significant emphasis on building Spotify into a truly great and sustainable business – one designed to achieve our goal of being the world’s leading audio company and one that will consistently drive profitability and growth into the future,” Ek said in an internal memo shared on SPOT’s website.

“While we’ve made worthy strides, as I’ve shared many times, we still have work to do. Economic growth has slowed dramatically and capital has become more expensive. Spotify is not an exception to these realities.”

Stockholm-based music streaming giant reported a loss of 462 million ($499.21 million) for the first nine months ended September 2023.

Spotify slashed 6% of its workforce, or about 600 employees, at the beginning of 2023. Then, in June, the company cut staff by another 2%, roughly 200 roles, primarily in its podcast division.  

Shortly after the latest round of layoffs was announced on December 4, SPOT’s stock surged nearly 8%.

Top Execs Continue Stock Sales

As the value of Spotify soared after the announcement of laying off almost a fifth of its workforce to cut costs, one of its top executives cashed in more than $9 million in shares.

On December 5, Paul Vogel, Spotify’s CFO, moved to sell more than $9.4 million worth of stock, according to securities filings. Also, two other senior executives cashed in approximately $1.6 million in shares, the Guardian reported.

Solid Last Reported Financials

SPOT reported a surprise profit for the third quarter that ended September 30, 2023, its first quarterly profit in a year and a half, as the music streaming platform’s price increases and cost-cutting measures began to take effect.

Spotify reported a third-quarter net income of 65 million ($70.24 million), or €0.33 ($0.36) per share, compared to a net loss of €166 million ($179.37 million), or €0.99 ($1.07) per share in the prior year’s period, respectively. It’s a significant beat, given analysts had estimated a loss of $0.21 per share. The company posted a profit, driven by “lower marketing spend and lower personnel costs and related costs.”

The company’s revenue was €3.36 billion ($3.63 billion), up 10.6% year-over-year. This is compared to the consensus estimate of $3.55 billion. Its gross profit grew 18% from the year-ago value to €885 million ($956.29 million). Furthermore, its operating income came in at €32 million ($34.58 million), compared to an operating loss of €228 million ($246.37 million) in the same quarter of 2022.

The Swedish music streaming giant raised the prices of its subscription plans earlier this year, increasing the monthly bill for users from nearly $1 to $2, depending on the plan. In its third-quarter earnings report, SPOT said “the early effects of price increases” were partially responsible for the 11% year-over-year revenue growth.

Spotify had 574 million monthly active users in the third quarter, an increase of 2% and 2 million ahead of its guidance. Also, its subscribers rose 16% year-over-year to 226 million.

Mixed Historical Growth

SPOT’s revenue has grown at a CAGR of 19% over the past three years. The company’s total assets have increased at a CAGR of 9.6% over the same timeframe, while its levered free cash flow has grown at a 138% CAGR. However, its tangible book value has declined at a CAGR of 21.6%.

Mixed Analyst Estimates  

Analysts expect SPOT’s revenue to grow 17.1% year-over-year to $4 billion for the fourth quarter ending December 2023. The company is expected to report a loss per share of $0.04 for the ongoing quarter. Additionally, the company missed the consensus revenue EPS estimates in three of the trailing four quarters, which is disappointing.

For the fiscal year 2023, Street expects SPOT’s revenue to increase 13.1% year-over-year to $14.33 billion. Also, the company’s revenue for fiscal year 2024 is expected to grow 17.3% year-over-year to $16.81 billion. However, its EPS is estimated to remain negative for at least two fiscal years.

Decelerating Profitability

SPOT’s trailing-12-month gross profit margin of 25.69% is 47.7% lower than the industry average of 49.13%. Its trailing-13-month EBITDA margin and net income margin of negative 2.84% and negative 5.74% compare to the respective industry averages of 18.71% and 5.74%.

Further, the stock’s trailing-12-month levered FCF margin of 1.35% is 82.8% lower than the 7.82% industry average. SPOT’s trailing-12-month ROCE, ROTC, and ROTA of negative 33.49%, negative 6.31%, and negative 9.64% are compared unfavorably to the industry averages of 3.41%, 3.38%, and 1.24%, respectively.

Elevated Valuation

In terms of forward EV/Sales, SPOT is currently trading at 2.57x, 44% higher than the industry average of 1.79x. Also, the stock’s forward Price/Sales and Price/Book of 2.71x and 15.53x are significantly higher than the industry averages of 1.14x and 1.82x, respectively.

Also, the stock’s forward Price/Cash Flow multiple of 90.62 is 845.7% higher than the respective industry average of 9.58.

Stock Downgrade

On December 1, Citigroup downgraded SPOT’s stock from “Buy” to “Neutral,” with its analyst Jason Bazinet citing revenue and user retention concerns. With significant changes in the company’s business model, from subscription price increases and an emphasis on developing podcasting content, there is uncertainty about the effectiveness of these strategies.

Bottom Line

SPOT’s fiscal 2023 third-quarter earnings beat analyst expectations on the top and bottom lines. Despite posting a surprise profit in the last reported quarter, the company recently announced the third round of layoffs for 2023.

Just days after mass layoffs, Spotify announced that its CFO Paul Vogel will step down after eight years of service at the company. Following a share price surge set in motion by an announcement of job cuts, top SPOT exes, including Vogel, continue to sell shares.

The recent layoffs and other cost-cutting measures align with the company’s broader strategy for financial sustainability. While several organizational changes at SPOT may prove fruitful in the long run, the company’s near-term prospects appear uncertain. Street expects the company to report losses for at least two fiscal years.

Even analysts at Citi raised questions about the effectiveness of the strategies, including major changes in SPOT’s business model, from subscription price increases to an increased focus on developing podcasting content.

Given its lower-than-industry profitability, stretched valuation, and uncertain near-term outlook, it could be wise to wait for a better entry point in this stock.