Ed Butowsky, managing partner at Chapwood Investments, joined Wake Up With Cheddar to break down the disappointing takeaways from Spotify's Q4 earnings report, which sent the stock plunging.

Wake Up With Cheddar

Spotify's Weak Growth Forecast Worries Investors

So for more on Spotify, let's bring in Ed Butowsky managing partner over a chap would investments Ed, Good morning, Good to have you here. So let's first talk about the earnings here. What was your initial reaction to the earnings report yesterday? I felt as though they missed um and they missed, you know, obviously on the revenue, but what they said afterwards was very disheartening because they basically said we don't have enough confidence in looking out more than a year and we're going to try to keep people happy just doing quarterly reports and not giving any guidance for the rest of the year. To me, that's a disappointment. If you're confident in your business model, then you should be able to project out more than a quarter. So I think that that's one of the main reasons that the stock goes down because they didn't do so badly on their earnings numbers. But I think it's what the comments were that really hurt them. Yeah, loss per share was about 21 cents. The expected numbers were about 43 cents revenue coming in at 2.69 billion. That was basically a beat here. But a lot of people are really focusing in on what's going on with the joe Rogan situation here. Clearly sort of this sort of tight this tightrope situation for Daniel Ek because they've mentioned how successful podcast have been to the platform and you clearly don't want to alienate your number one podcaster, but clearly you're having a lot of musicians who are having second thoughts about being on the platform here. Yeah. So, so you have to separate the musicians from the podcasters because the podcasters are advertising dollars coming in. And also, yes, there's also one other thing to remember is that people who do podcast do that for the freedom that they have to say whatever they want to say, even if it's controversial, and then when they marry themselves to a Spotify, they still believe that they're going to have that freedom to say whatever they want to say. Um and the musicians, the musicians, you know, albeit, you know, CSN y uh Neil young Joni Mitchell, These are not your quote a listers, I mean, even though they're very famous and well known, these are not people that people are going to cancel their subscription and their premium subscriptions from because they pulled their music, I mean, you know, if you had Adele and Rihanna and Justin timberlake, you know, people might start taking a look at when I use Spotify, I'm using it because I can get every music I can think of under the sun and I don't just look at it for one musician, but for a podcast, some people are subscribing just to get podcasts and a podcast broadcaster does not want to be limited on what they say. So this is how Spotify handles this will have a lot to do with what other podcasts they're able to get on the platform. Absolutely, yeah, Spotify, as you mentioned, makes the bulk of its money from subscriptions here. Not so much the ad revenue that they get maybe from the podcast here, but this is sort of maybe indicate that maybe they need to diversify. So that way they're not so reliant on the subscription revenue here. Well, that's that's exactly why they're going to the podcast because about 15% of the revenue, I think it's about 15% comes from advertising dollars. And they would love to have that number, you know, bolster and get higher. It's kind of the opposite to a lot of companies would love to have reoccurring revenue from subscribers. But I, you know, I kind of played around with some of the numbers, they have 400 million subscribers. That's 5% of the world's population. I don't know how much more of the world you can get on Spotify and and pay a premium. And when you're looking at a growth stock, you need to have, you know, incredible growth to support the lofty levels. You have a $40 billion dollar market cap for a company that's not earning any money, even though they're projected In their previous estimates to be making money in 2022, you have to say to yourself, how much are people willing to pay for an entity or an enterprise that's you know, basically valued at 40 billion. That makes nothing. So it definitely you want to have to the subscribers, you want to increase the subscribers. I just don't know how many more subscribers that are out there that are going to pay the $10 or $11 a month. Okay, that that's a really good point. And then, and that adds, that brings me to my next question because Spotify says they're no longer going to offer annual guidance when it comes to subscribers. Is that sort of what you're implying here? Basically they've almost like topped out. It's what we see with netflix, it's like how many more subscribers are even left that don't have an account here. That's right. That's exactly my point. And you know, so you have to find other revenue sources. And again, to, you know, heart back onto the point of $40 billion dollars of enterprise value. You know, you have to wonder how how can you substantiate that number if you're not growing because they are a growth stock, There's no question about it. And growth stocks rely on future growth. And if you're not having the growth in subscribers, you have to have the growth somehow to bring in additional revenue and that's why they're focusing on the podcast because they can get advertising dollars on those. You brought up are also really good point. Obviously, you know, yes, Neil Young, I love me some Neil Young, but obviously he's not going to be the one that's gonna move the needle when it comes to joe Rogan, but he's he's coming out now saying that he's working with amazon music Sirius XM now giving Neil Young his own radio station here. Is there any concern that this could also prop up competitors here? Yes. Spotify still leads when it comes to subscribers. But is if artists continue to defect, Spotify, does that give an opening to the Apple music's and the Sirius XM down here? Well, I don't think that Spotify has a unique relationship in that they're exclusive. So, you know, I can go on amazon music or google music and, and get Neil young and just like I could on Spotify, so I don't think there's an exclusive relationship between any of them. So I'm not sure that that would be a concern of mine. The concern would be how well they can advertise to get additional subscribers. And, uh, you know, it's really to be seen on a quarter by quarter basis, I guess.