Spotify expects podcasting to be a $20 billion market in the long term, which is why the company has continued to invest in this side of the business heavily in the past. its third-party, better-monetized business. Spotify owns exclusive programs such as "The Joe Rogan Experience," which causes margin pain vs. A flip in the narrative hinges on scaling up podcasting ads, and with the hefty investments done, guidance for breakeven in the next 1-2 years may be achievable even as economic weakness limits visibility. With the US podcast market expected to double over the next few years from $1.8 billion in 2022, the company has been investing heavily in technology to improve monetization, though this has created a heavy pull on margin. Spotify dominates US podcasting, with $215 million in 2021 revenue and around $300 million in 2022, yet it dragged down 2021 gross profit by $110 million. Podcasting Investments To Pay Off In the Long Term Gradual price increases should help with profitability although the impact may not be significant in the short term, I expect it to contribute positively to profits in the long run. While Spotify continues to experience strong user growth, the industry is shifting its focus toward profitability rather than rapid expansion. Reducing spending on podcast content (after investing $1 billion over the past four years), trimming marketing expenses, and workforce reductions are expected to contribute to this effort. The company has been emphasizing better discipline in managing both new and existing projects, which suggests there's room for further cost-cutting. In January, it reduced its workforce by 6%, and in June, it carried out another round of layoffs, particularly in the podcasting division, as part of a broader restructuring. Spotify is now paying more attention to cost control. However, executing these strategies effectively is key. Expanding the gross margin is crucial for the company, and it has strategies in place, including efforts in advertising, podcasting, and its Marketplace business. In the third quarter, the gross margin was reported at 24.7%, slightly below the targeted 25.2%, and the company is expected to post GM margin of 24.5% in the fourth quarter. Spotify performed better than expected in terms of user metrics in the third quarter, but there are challenges ahead for improving its gross margin. I am positive that the company will continue to improve on its user growth and profitability metrics in the future and hence assign a buy rating to the stock at current levels. The company's robust revenue growth, monthly active user growth, and additions of premium subscribers provide a solid foundation for its margin improvement and valuation. I believe Spotify's ownership of podcast content could be a significant driver for growth, especially as the pressure from previous heavy investments begins to ease. Its path to sustained profitability largely depends on effectively leveraging podcasts, as music content owners hold a strong position in negotiations. The company currently boasts 195 million premium subscribers and 456 million monthly active users. Spotify Technology S.A.'s ( NYSE: SPOT) growing exposure to podcasting and advertising could counterbalance any potential slowdown in user growth and ultimately improve its profitability in the long term.
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