Spotify continued its scale of subscribers using its platform. But its business model meant gross margins would stay low indefinitely. Which is why we avoided the stock.
But the most important part of investing is one’s ability to change opinions when the facts change.
“Spotify is up 70%+ this year. And smashing its peers and indexes (see below).
Why? Because it focused on making money — a.k.a being a real business…
Spotify is leaning into ideas that make real money — raising prices and bundles. Subscription prices have gone up twice in the last 12 months and there’s been launches of several new subscription bundles for users.
As long as Spotify focused on what makes money… it’ll continue being rewarded with a higher share price.”
Spotify is up more than 3X in the past 12 months.
We repeat: Spotify is crushing it because it’s focused on making money.
It reported earnings last week and beat expectations.
Spotify reported its first ever full year of profitability. It raised prices on its premium tier again. While paid subscribers continued to grow. More from the Wall Street Journal (emphasis added):
“Net income for the year was €1.14 billion, equivalent to about $1.18 billion, compared with a loss of €532 million in 2023.
Ek on Tuesday told investors the company aims to pick up the pace of new initiatives and ship new products faster. He said music—and offerings like a higher priced premium tier including hi-fi streaming and remix tools—would be a focus this year.
“You should expect there to be many more versions of Spotify in the future that will adapt to the many subsections of this consumer base,” including superfans, Ek said.
Monthly active users climbed 12% to 675 million—the strongest fourth quarter in the company’s history and topping guidance by 10 million…
Other key highlights from Spotify’s fourth-quarter earnings:
Premium subscribers, Spotify’s most lucrative type of customer, grew 11% to 263 million, above expectations.
Average revenue per user for its subscription business ticked up 5% to €4.85, thanks to price increases. The metric has been pressured as Spotify brings in new subscribers via discounted plans and lower prices in emerging markets.
The rate of customer defections was low in markets with price increases, and additional hikes are likely, Spotify co-president and chief business officer Alex Norström said.
Ad-supported revenue grew 7% to €537 million, driven by both music and podcasts.”
Daniel Ek focused on profitability without sacrificing growth. And, as a result, Spotify continues to break out to new all-time highs.
That’s how you run a publicly traded company.
2) Is The AI Narrative Fading?
It’s hard to tell. But we’re seeing signs of the narrative cracking around the seams.
Every company is finding a way to incorporate AI into press releases because they know investors will bid up its stock.
It’s worked for two years now. We think that’ll come to an end.
Companies will announce progress of AI into their business models. But investors won’t bid up their stock. At least not to the extent they’ve done the past two years.
Investors will be focused on other events — both positive and/or negative.
Wall Street needs a new narrative to pump stocks. We’ll find out what it is. But it won’t be AI.”
Stocks are still rising with the AI narrative. But investors are starting to get wary.
Microsoft, Google, and Amazon all fell after reporting earnings.
It wasn’t that they missed on revenue or earnings. It’s that they all reiterated tens of billions of dollars in capital expenditures (capex) for the AI buildout.
Investors applauded these capex announcements in 2023 and 2024 by sending shares higher.
Now they’re questioning whether all this money will generate a positive return on investment. Which is why they sold off after each company reported.
The sheer questioning is the start of an AI narrative pivot.
3) Hershey Profitably Trades Cocoa
Hershey continues to reel from surging cocoa prices.
“Record-breaking cocoa prices have left a bitter taste for candy companies, and show why derivatives markets can offer some relief.
Pennsylvania-based Hershey said it booked a $460 million pretax gain last year from its commodity derivative positions, which the chocolatier uses to help price future inventory needs. More than half of that accounting gain came in the fourth quarter. Its full-year profit totaled $2.22 billion.
“One of the benefits of a great hedging and commodity team is we’re not paying the market price,” Chief Financial Officer Steve Voskuil said Thursday.”
Investors don’t really care about Hershey’s derivative trading gain in Q4 because it doesn’t reflect anything fundamental with the underlying business… Just look at the stock price.
But our bet is the leadership team at Hershey will give big bonuses to the hedging and commodity team for that $460 million profit.
Our advice remains the same: Hershey is a trophy asset company you want to own long-term. Cocoa supply issues are “one time solvable issues” which is why we get interested with the stock down 40%+ from its highs.
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DISCLAIMER: This is solely our opinion based on our observations and interpretations of events. This should not be construed as personal investment advice.
