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Spotify logo with headphones dangling
Christian Hartmann/REUTERS
By embracing free trials, Spotify has grown its audience.
FREE REIGN

Spotify is still the king of music streaming—for now

By Matthew De Silva

Spotify’s stock price leaped 15% today (Oct. 28) as the music streaming service delivered a surprise profit for its third quarter.

The company reported a gross profit of €441 million (roughly $490 million) on €1.73 billion (about $1.92 billion) in revenue, marking just the second time Spotify has been in the green as a public company. Revenue grew 28%, while profit increased by 29% compared to the same period last year. The company also said free cash flow, a popular proxy for financial health, remained positive for the eighth consecutive quarter.

User growth, in particular, was music to shareholders’ ears. Spotify now boasts 248 million monthly active users (MAUs) and 113 million subscribers, with its paid user base growing 31% year-over-year. “Net Subscriber growth exceeded our expectations and was led by strong performance in both Family Plan and Student Plan,” two of the company’s discounted offerings, Spotify said in prepared remarks.

Due to the strong listener growth, Spotify maintained its sizable lead in the music streaming industry at large. Competitor Apple Music counts just 60 million subscribers (paying and on free trials) according to figures disclosed in June. Meanwhile, Amazon’s Unlimited and Prime Music had 32 million users as of April, according to the Financial Times (subscription).

Spotify’s third quarter gave investors respite from a rough two months—shares had fallen from $160 to $112 before rebounding on the earnings report. At the time of writing, Spotify shares were trading for $137.

The company said it has been encouraged by advances in podcast listening. “We continue to see exponential growth in podcast hours streamed (up approximately 39% Q/Q) and early indications that podcast engagement is driving a virtuous cycle of increased overall engagement and significantly increased conversion of free to paid users,” Spotify wrote. Still, only 14% of the company’s MAUs have started listening to podcasts, it noted.

Despite an optimistic outlook—the company’s leaders “feel very good about [their] competitive position in the market”—guidance for the fourth quarter isn’t quite as rosy. Although it anticipates expanding to 266 million MAUs and 123 premium subscribers, Spotify expects an operating loss of €133 million for the quarter. The company did not provide a reason for the expected losses, but they can likely be attributed to reinvestment as Spotify develops its presence in emerging markets.

While Spotify has consistently grown its audience, the company still hasn’t proven it can reliably translate listeners into profits. Although it’s ahead of Apple and Amazon, the company doesn’t enjoy a financial cushion from other business lines like the iPhone or Amazon Web Services. So, Spotify remains the king of music streaming, but uneasy lies the head that wears the crown.