Spotify 'not well-run' operationally despite bullish podcast sentiment, says analyst

·Senior Reporter

June 9, 2022 at 4:52 PM·3 min read

Spotify (SPOT) is all in on podcasts — but questions still loom over the audio giant's fundamentals.

"Spotify is clearly the leader in the podcast space," CFRA analyst John Freeman told Yahoo Finance, noting that although the company's future potential "is amazing," the platform is "not well-run in the operational aspects."

Freeman listed several fundamental concerns, including issues surrounding the company's software and interface, as well as an inability to turn profits and what he describes as a "sloppy handling" of the Joe Rogan podcast controversy earlier this year.

"Those kinds of things make me have a neutral to almost semi-negative fundamental view, relative to the potential," the analyst said.

Investors seem to have similar concerns with shares tumbling by more than 50% so far in 2022 and by 70% since reaching an all-time high in February 2021.

But shares jumped over 6% in midday trading on Wednesday after the company revealed during its investor day that it brought in roughly $215 million in podcast revenue last year.

Spotify's chief content and advertising business officer Dawn Ostroff told investors that the audio giant is still in "investment mode" after spending a whopping $1 billion on its podcast unit so far; yet, she expects the business to be a "$20 billion opportunity" with continued improvements in both ad products and monetization.

The problem is not [Spotify's] gross margin line, it's the operating margin line...John Freeman, CFRA Analyst

CEO Daniel Ek also underscored the potential of the platform's podcast unit, estimating that he expects it to generate margins between 40% to 50%.

That margin call seems to have been the catalyst for Wednesday's stock surge, but Freeman said "the problem is not the gross margin line, it's the operating margin line."

In April, Spotify issued quarterly gross margin guidance that fell short of Wall Street's estimates, in part due to its spending on non-music content.

Spotify "has been a public company for a while, and they've really never been profitable," he continued, signaling that the platform's sky-high costs for its podcast deals (which included a reported $200 million multi-year licensing contract with Joe Rogan) can only go so far.

"The problem with paying Joe Rogan, or whoever, a lot of money is that you lose leverage on a certain percentage of your subscriber base and it then becomes the 'Joe Rogan show,'" the analyst explained.

He added, "I have no problem with them sacrificing growth — if they can show some profitability."

The Joe Rogan Experience is one of the most successful podcasts on Spotify's platform (Dado Ruvic / reuters)

Despite the costly endeavor, Freeman noted that there is still "growth on the advertising side," although it will take some time to fully mature.

U.S. podcast advertising revenues rose to $1.4 billion in 2021, surpassing the $1 billion mark for the first time, according to a study from the Interactive Advertising Bureau. The bureau predicted that the market will exceed $2 billion in 2022 with an estimate of over $4 billion by the year 2024.

Overall, CFRA's Freeman maintains a strong Buy rating on the stock, citing it as a "shorter term, valuation-based trade."

He advised the company to continue to focus on podcasts (he's particularly bearish on the audiobook component of the business), explaining that continued growth overseas will be an important profitability element moving forward.

On Thursday, Bank of America reiterated its Buy rating on the stock, raising its price target to $164 a share (up from $137.)

Raymond James, meanwhile, upped its outlook earlier this week — upgrading shares to Outperform from Market Perform and offering a price target of $150 per share.

Alexandra is a Senior Entertainment and Food Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at alexandra.canal@yahoofinance.com

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