Spotify's (SPOT) Q3 Earnings On Deck: Can Apple Music Take The Throne?

Spotify (NYSE:SPOT) is set to report its third quarter results on Monday, October 28 before the opening bell. The music streaming company has seen its shares rise a moderate 6.5% year-to-date in 2019, slightly lagging behind the broader technology service market’s 8.2% YTD run. However, despite being in the green for the year, the company has seen its shares plummet 22.3% over the past 12 weeks as competition from rival music streaming service Apple Music (NASDAQ:AAPL) ramped up. Let’s take a closer look at the company and how they might perform in the closing months of the year.

Spotify Continues Growth Campaign as Apple Music Creeps Up

Apple Music has been around since 2015 and already has 60 million free and paid subscribers, compared with Spotify's 232 million total users. The redesigned Apple Music unveiled last month comes with a new browser-based music player that bears a passing resemblance to Spotify's browser platform. As competitors like Apple Music creep up on Spotify’s market share, the company has ramped up its own growth efforts to offset the impact from rival streaming services’ growth.

Spotify ended the second quarter with approximately 32.4 million premium subscribers in North America for a 26% year-over-year increase. Spotify has set up a strong conversion pipeline from free listeners to paid subscribers. The company reels consumers in with the compelling offer of free unlimited on-demand music streaming. Then, after providing more value than expected, it can sell users on a subscription.

One of Spotify’s features that distinguish it from the rest of the streaming services in the industry is its playlists. The tech service firm says more than two-thirds of listening hours come from playlists. About half of that comes from algorithmically generated or Spotify-curated playlists, which users couldn’t find on competing services like Apple Music until recently.

Outlook

Combined with a compelling way to try out the service risk-free, Spotify has an excellent path to subscriber growth. According to a survey from Consumer Intelligence Research Partners, 18% of free listeners are signing up for Spotify's free trial subscription. It also found that 72% of trial members converted to paid subscribers which is a huge conversion rate.

Spotify has continued to gain premium subscribers at a strong pace in North America while Apple Music has started to stall. Apple was growing robustly in 2018, and it was estimated that it would overtake Spotify's premium subscribers in the U.S. last summer, but it didn’t surpass Spotify until February. It took Apple more than a year to go from 50 million subscribers to 60 million. During the same period, Spotify added over 25 million global subscribers.

Our Q3 consensus estimates project earnings to fall over 248% Y/Y to a loss of $0.40 per share, while sales grow 21.66% to $1.91 billion. Looking ahead to Spotify’s full fiscal 2019 figures, our estimates call for the firm’s bottom line to see a decline of 265% to a loss of $2.19 per share while sales climb 27.37% to $7.53 billion.

Takeaway

Apple has overtaken Spotify in the North American market, which represents the largest music market in the world. But, its growth has slowed down. In the mean-time, Spotify continues to substantially expand its subscriber growth in international markets. Spotify investors should expect the company to continue outpacing the overall market in terms of subscriber growth, and it may even retake the subscription lead from Apple. While Apple Music does pose a threat to Spotify’s pricing power, Spotify remains the name to beat in the music streaming space and currently sports a Zacks Rank #3 (Hold).

5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

Today, See These 5 Potential Home Runs >>