What a year it's been for the stock market so far. The S&P 500, NasdaqComposite, and DowJonesIndustrialIndex are up 18%, 18%, and 10%, respectively.
Yet, there are many stocks that are outperforming the benchmark indexes. Let's have a look at one such stock: SpotifyTechnology(NYSE: SPOT).
Image source: Getty Images.
Spotify stock has been on a tear
When it comes to Spotify stock, one fact is undeniable: It has been a great name to own since the start of 2023. Indeed, after the stock bottomed around New Year's Day 2023, shares of Spotify have climbed more than 330% over the following 20 months.
Granted, on a longer time scale, it's more of a mixed story for Spotify. After debuting via an initial public offering (IPO) in 2018, the company's shares were more or less flat for its first two years of existence. Then, the COVID-19 pandemic happened. Shares of Spotify went through the roof as lockdowns forced everyone into their homes -- and onto streaming services. The stock peaked at $387 per share in early 2021. Then came the collapse.
Spotify shares dropped 76% from their peak as pandemic restrictions eased and tech stocks fell out of favor in late 2021 and into 2022. By early 2023, investors could pick up shares of Spotify for under $100 per share.
What is driving Spotify's turnaround?
So, clearly, something has changed for Spotify, but what is it?
There are several factors at play, but one of the most important reasons why Spotify's stock has rebounded is that its management has embarked on a path of cost cutting.
First, let's understand where most of the company's costs come from. Spotify, as a streaming service, must pay royalties to artists and music companies whose music appears on its platform.This allows the service to stream famous songs from countless artists, from Taylor Swift to The Beatles.
In 2023 alone, Spotify paid more than $9 billion in music royalties. For context, the company generated $14.3 billion in revenue. So, about 62% of the company's revenue was used just to pay royalties. That left $5.3 billion for everything else -- employee salaries, marketing, technology, etc. So, it's no wonder that the company's 12-month net loss hit a low of more than $1 billion in 2023.
SPOT Net Income (TTM) data by YCharts
However, what has Wall Street so excited is that Spotify is trimming back where it can. Obviously, it still has to pay royalties, so those cuts are coming from other areas within the company. Back in 2023, the company cut around 1,500 employees, or 17% of its overall workforce, in an effort to streamline its operations and scale back some non-core business areas like its podcast unit.
What's more, Spotify has another plan to boost its profits: Raising prices. In June 2024, the company announced that the monthly cost of its individual plan was increasing by $1 to about $12/month, while duo and family plans were increasing by $2 and $3, respectively. That should further boost Spotify's profit by raising increasing its overall revenue.
Is Spotify still a buy now?
In short, yes, Spotify remains a solid stock for those investors who are willing to hold it for the long run. That's because Spotify, like video-streaming giant Netflix, has carved out a massive subscriber base that appears to be durable. That's allowed the company to raise prices and increase profits. And that's why Spotify is making its shareholders very happy.
Should you invest $1,000 in Spotify Technology right now?
Before you buy stock in Spotify Technology, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Spotify Technology wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $731,449!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of August 26, 2024
Jake Lerch has positions in Spotify Technology. The Motley Fool has positions in and recommends Netflix and Spotify Technology. The Motley Fool has a disclosure policy.
