Is Spotify's Business Model Sustainable?

As people are confined to their homes, they have traded the early morning commute for a lie in or a stroll in the park, at least according to Spotify (NYSE: SPOT) that is, which claims that "every day now looks like the weekend." The company revealed that customers' listening patterns have changed immensely because of the pandemic as peak-hour commuters are now tuning in while they cook and do household chores. It is fair to say that business for Spotify is looking better than ever, but is it sustainable?

Spotify's earnings

Spotify recorded 130 million paid subscribers in its first-quarter earnings for 2020, an increase of 31% on last year. More people are working from home in the current economic climate, which seems to be increasing the number of streaming services used during the day. There are currently around 286 million monthly active users for the first quarter, compared to 271 million in quarter-four of 2019. More people listening means more money for the company, with premium subscribers jumping by 6 million, posting $1.97 billion in revenue, up 22% on last year.

The increase in users could be related to COVID-induced stress, with Spotify revealing an uptick in customers opting for more 'chilled' music. The platform also offers a number of podcasts, which is a great way to kill time for those stuck at home all day or even while they are working. Spotify is showing no signs of slowing down and analysts expect more people to tune in, with users predicted to rise up to 138 million in the next quarter.

What is the negative impact of the coronavirus?

A problem that many businesses around the globe are encountering, including Facebook (NASDAQ: FB) and Twitter (NYSE: TWTR), is a decline in advertising sales. Spotify saw a loss of sales that were either canceled or paused, with buyers pulling back their spending. Luckily for the streaming company, a rise in subscribers and listeners meant Spotify was still able to come out on top. Also, ad sales only contribute to about 10% of the businesses' total revenue.

Let's also not forget that Spotify faces tough competition from Big Tech companies including Apple (NASDAQ: AAPL) and Amazon (NASDAQ: AMZN). Amazon has made a big push into premium music streaming in recent years. As for Apple, the tech giant made around $13.34 billion for the first quarter of 2020 for its services which includes music and cloud. The company does not release its exact figures of listeners, but they are believed to be around the 60 million mark, proving Spotify's dominance in the space in terms of listeners, holding about 36% of the global streaming market.

Is Spotify's growth sustainable? 

The future is unknown with the current pandemic, and it is likely many people will continue to work from the comfort of their homes for a long time. This means that Spotify should continue to gain more subscribers and still see "weekend" style patterns.

As for dealing with its competition, Spotify recently announced the exclusive signing of Joe Rogan, who has a popular podcast boasting 8.4 million subscribers on Google-owned YouTube (NASDAQ: GOOG). This is a huge win for Spotify and is also likely to attract more free users or subscribers! Overall, Spotify is a good investment and if subscriber growth slows down, advertisement revenue should pick back up once the economy stabilizes.

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