Spotify Cuts Costs. Spotify Valuation

 

Spotify Technology SA, the music streaming service today announced it will cut 17 % of its staff. 

17 % is a large share of the current staff, which will cause undoubtedly immense pain to many people from the 9 000 current staff of Spotify.

Actually, the reason stated by Spotify is that the company is cutting jobs to cut costs to achieve profitabiliy. Spotify has not been profitable for a year. When Spotify achieves profitability on a quarterly basis, the profitability is very low, 2 % net profit margin on average.

While cutting jobs will help, Spotify seems to have high expenses even after 17 % of jobs are cut. This seems to have been the result of the abundant financing Spotify has received through the years.

Spotify is the closest social media rival to Meta Inc. the owner Facebook, according to Wolfteam Ltd.'s corporate view. It is not surprising Mark Zuckerberg is close friends with Spotify's founder Daniel Ek.

When announcing 3rd Quarter, 2023 earnings, Spotify reported 574 million active users. Meta Inc, with its Facebook property has around 3 billion monthly active users. Meta is valued at 811.61 billion USD market capitalization currently. So if we divide 811.61 billion USD by 5.5, the number of times Meta has more users than Spotify we get to around 145 billlion USD implicit market value for Spotify, when compared with Spotify's monthly active users. This compares to Spotify's current market capitalization of 37.99 billion USD. 

So potentially, Spotify's stock price can rise around fourfold from current levels. 

Meta Inc, however is much more profitable than Spotify. Meta Inc reported 19.90 % net profit margin for 2022 full year statements:

Fourth Quarter and Full Year 2022 Financial Highlights
Three Months Ended December 31,
% Change
Year Ended December 31,
% Change
In millions, except percentages and per
share amounts 2022 2021 2022 2021
Revenue $ 32,165 $ 33,671 (4) % $ 116,609 $ 117,929 (1) %
Costs and expenses 25,766 21,086 22 % 87,665 71,176 23 %
Income from operations $ 6,399 $ 12,585 (49) % $ 28,944 $ 46,753 (38) %
Operating margin 20 % 37 % 25 % 40 %
Provision for income taxes $ 1,497 $ 2,417 (38) % $ 5,619 $ 7,914 (29) %
Effective tax rate 24 % 19 % 19 % 17 %
Net income $ 4,652 $ 10,285 (55) % $ 23,200 $ 39,370 (41) %
Diluted earnings per share (EPS) $ 1.76 $ 3.67 (52) % $ 8.59 $ 13.77 (38) %

So Spotify in order to become a really viable, long-term social media competitor to Meta's Facebook, Spotify has to increase profitability. But cutting 17 % of jobs will not seem to do the job of achieving yearly net profit margin of around 20 %. Meta Inc in its most recent full years reporting achieved net profit margins for 2020 and 2021 in excess of 33 % even.

Apparently, Spotify has to involve its work force more, find more efficient ways to use its labor and capital resources.

All in all, though, Spotify's intrinsic worth is 190 billion USD, according to Wolfteam Ltd.

In addition, Meta Inc with all the data gathered from Facebook, Instagram, WhatsApp, Messenger has an intrinsic worth of 1.05 trillion USD.