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Spotify Unwrapped: Streaming Giant Stuck Between Layoffs And Analysts Appreciation

Last Updated December 12, 2023 1:40 PM
Giuseppe Ciccomascolo
Last Updated December 12, 2023 1:40 PM

  Key Takeaways

  • Despite laying off employees, Spotify is still performing well financially.
  • Analysts are still bullish on the music streaming giant’s long-term prospects.
  • Why did analysts welcome the latest firing news?

Global streaming giant Spotify is finding itself in a curious position, juggling layoffs and analyst praise. The company, known for its vast library of music and podcasts, announced a series of layoffs earlier this month, affecting a small percentage of its workforce. The move was met with criticism from some, who questioned the company’s priorities amid its continued growth and profitability.

However, analysts have been generally optimistic about Spotify’s future, citing its strong user base and its ability to monetize its content through advertising and subscriptions. The layoffs have been seen as a necessary step to streamline Spotify’s operations and focus on its core business. As the company navigates these challenges, it will be interesting to see how it balances its cost-cutting measures with its long-term growth ambitions.

Over 1,500 Employees Laid Off

A significant corporate restructuring at Spotify (SPOT)  is poised to have an impact on approximately 1,500 employees. That represents about 17% of the global workforce of 9,000, with a substantial portion – 4,300 individuals – located in the United States.

The decision to implement this extensive round of layoffs was attributed to what CEO Daniel Ek referred to as “the challenges ahead”. The company’s preference was to carry out these redunancies in a consolidated manner rather than gradually.

Human resources managers will reach out to affected employees in the coming hours to engage in individual discussions about the situation. In response to these changes, Ek affirmed that all affected individuals will receive severance pay, averaging around five months’ worth of salary, compensation for all accrued and unused vacation days, continuous healthcare coverage during this transitional period, and assistance with immigration and relocation matters.

According to Ek, Spotify today “still has too many people dedicated to supporting work rather than contributing to opportunities with real impact” and it is therefore necessary for more people to focus on outcomes for creators and consumers.  He said: “In short, we must become relentlessly enterprising”.

Wall Street Appreciates The Move

Rosenblatt has elevated its rating on Spotify shares from Neutral to Buy, concurrently adjusting the price target to $300, a notable increase from the previous $150 valuation.

The analysts at Rosenblatt perceive the recent restructuring by the Luxembourg-based music streaming service provider as either harboring concerns or holding promise.

In the worrisome scenario, the analysts speculate the workforce cuts could foreshadow a deceleration in sales growth, which may rise by nearly 20% excluding currency fluctuations in the last quarter of 2023. Additionally, they noted an anticipated subscriber growth of around 30 million for 2023.

On a more optimistic front, the analysts posit that robust sales and subscription figures, coupled with stringent cost controls, may lead to a significant surge in profit margins. Following a thorough evaluation, the analysts expressed a preference for the latter outlook. This prompted them to upgrade the stock to Buy and double the price target to $300.

Last Bard, another analyst, underscored that Spotify’s recent strategic shifts indicate a “renewed commitment” to achieving a balanced set of priorities.

Seeking Alpha ‘s Quant Rating system bestows a Strong Buy rating on Spotify, consistently outperforming the market. Moreover, both the average ratings among Seeking Alpha and Wall Street analysts align. Both groups rated the stock as Buy.

What’s Ahead For Spotify?

Ek said: “A reduction of this size will make it necessary to change the way we work. And we will share much more about what that means in the days and weeks ahead. Just as 2023 marked a new chapter for us, so will 2024 as we build one Spotify even stronger.”

Spotify, which recently made “Wrapped 2023” available to its users, has recorded constant growth since its launch. Today, it boasts 574 million monthly active users, up by 26% compared to the same period last year.

Ek added: “We discussed possible smaller reductions throughout 2024 and 2025. However, considering the gap between our financial target and our current operating costs, I decided that substantial action to scale back our costs was the best option to achieve our goals. While I believe this is the right action for our company, I also understand that it will be incredibly painful for our team.”

On the financial side, as anticipated, analysts expect Spotify stock price to increase further in the following months. But by how much?

Analysts view on Spotify stock
Analysts view on Spotify stock

According to Marketscreener , it can reach $279.24. 70% of analysts covering the stock have a Buy or Outperform view on the stock. Only 30% of them suggest holding the shares.

CFO Leaves

It’s hard to figure out how Spotify – both the company and the stock – will perform next year. However, there’s something you can be sure will happen in 2024: the CFO departure.

In fact, the music streaming giant has announced its Chief Financial Officer, Paul Vogel, will be leaving the company on March 31, 2024.

Ek said: “Spotify has embarked on an evolution over the last two years to bring our spending more in line with market expectations while also funding the significant growth opportunities we continue to identify. I’ve talked a lot with Paul about the need to balance these two objectives carefully.

“We’ve come to the conclusion that Spotify is entering a new phase. And it needs a CFO with a different mix of experiences. As a result, we’ve decided to part ways. But I am very appreciative of the steady hand Paul has provided in supporting the expansion of our business through a global pandemic and unprecedented economic uncertainty.”

He added: “As we initiate the search for a new leader, we do so from a position of strength. I am enormously proud of the strides we’ve made as a company. We are on track to deliver against the goals we outlined at our Investor Day and our recent actions will help us accelerate these efforts. We look forward to tapping a strong financial leader as our next CFO and I will share more details soon.”

During this period, Ben Kung, currently serving as Vice President of Financial Planning and Analysis, will assume additional responsibilities. This will occur to facilitate the company’s restructuring of its financial leadership team.

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