Spotify doesn’t deserve the identical therapy as different streaming corporations, in keeping with a rising variety of individuals on Wall Street. “I think that is the most interesting name that people have completely written off,” LightShed Partners’ Rich Greenfield mentioned final week on CNBC’s ” Squawk Box .” Shares of the streaming firm are down roughly 50% this yr, as buyers, aware of an period of rising rates of interest, dumped shares of tech shares and different progress names. Audio chief Still, some buyers say that Spotify shouldn’t be tarred with the identical brush as Netflix or different streaming corporations which have cratered this yr due to weak consumer numbers. These proponents say Spotify has cornered the market on music worldwide, and will seize extra of the overall audio market because it expands into podcasts and audiobooks. “They have very little competition. They dominate the category,” Greenfield mentioned. “Yes, it’s a low base, but they are certainly growing faster than peers.” Those rivals embrace well-heeled rivals equivalent to Apple, Amazon and Google-parent Alphabet, all of whom have made forays into streaming music and podcasts, and will leverage their companies to assert extra market share. Nevertheless, Spotify has maintained its main place. Last week, the streaming firm beat income expectations in its second quarter earnings , and reported that it added 433 million month-to-month lively customers, which is nineteen% greater year-over-year, and 5 million above steering. Meanwhile, paid subscriber progress expanded by 14% year-over-year to 188 million. Shares surged following the quarterly earnings report. “While the macro environment continues to present uncertainty, we’re currently not seeing any material impact on our expectations for users or subs growth from the economic downturn,” Spotify CEO Daniel Ek mentioned in the latest earnings name. “In fact, we’re seeing several markets trending ahead of our forecasts.” “We’re confident in our ambitions to get to 1 billion users by 2030, while at the same time we are also focused on omproving our gross margins and continuing to generate positive free cash flow,” he added. Morgan Stanley analysts anticipate that Spotify can maintain a higher than 30% market share in streaming over time, in keeping with a latest observe. “They’re the leader in that global TAM,” mentioned Evercore ISI’s Mark Mahaney, referring to the overall addressable market. “We’ve run survey work on Spotify for years, and they are the leading player on both Android and Apple devices. So, there are more people who subscribe to music or join music on Apple phones using Spotify than actually Apple Music.” Meaningful margin growth To make sure, different buyers are essential of Spotify, questioning whether or not the enterprise can ever obtain sturdy earnings , particularly as recession issues loom and rates of interest rise. “While we believe there remains material user growth left for Spotify we highlight that many investors question whether Spotify will ever be able to generate significant lasting profitability,” wrote Pivotal’s Jeffrey Wlodarczak in a July 28 observe. The analyst has a maintain score on the inventory. The streaming firm has to cope with highly effective music labels that might renegotiate offers and restrict positive aspects in Spotify’s earnings, in keeping with Pivotal. Nine out of 10 songs streamed on Spotify are owned by simply 4 music corporations, the report mentioned. At the identical time, because it went public in a direct itemizing in 2018, Spotify has didn’t broaden its low gross margins, at the same time as its income base has doubled, in keeping with Evercore ISI’s Mahaney. Gross margins for the corporate declined to 24.5% within the three-month interval ending in June, down from 24.9% within the first quarter of 2022. They beforehand reached an all-time excessive of 28.1% within the second quarter of 2021. Still, at Spotify’s June Investor Day, CEO Ek famous that gross margins from music are “steadily climbing,” at the same time as they’re dragged down by the corporate’s podcast investments. Since its public debut, Spotify has gone on a spending spree, snapping up podcasting networks equivalent to Gimlet Media, in addition to the rights to stream Joe Rogan’s podcast. “There’s two possible explanations for this lower gross margin result,” Ek mentioned on the occasion, in keeping with a FactSet transcript. “One might be that Spotify just isn’t that good of a business. And the other is that we’re investing behind the strength of our business to make the business bigger, stronger and more resilient; and I will share with you today that the music business is doing much better than you think.” For Evercore ISI’s Mahaney, because of this there is a “gross margin inflection point” coming for Spotify, as the corporate begins to drag again on podcast investments, and because it continues to realize scale in its promoting income enterprise. “If that’s true, then gross margin should expand next year,” mentioned Mahaney.