Shares of music streaming company Spotify (SPOT) surged nearly 13% after announcing upbeat second-quarter results, driven by a robust advertisement and subscriber growth. Whereas Starbucks’ (SBUX) soared 2% following strong third-quarter results, defying the inflationary impact on its business and giving investors a huge sigh of relief.
Spotify posts upbeat second-quarter earnings
Spotify (SPOT) reported solid results for the second-quarter, beating analysts’ estimates on the top line. The Swedish music company posted 23% growth in revenue, taking the figure to €2.86 billion. The company incurred a loss of €0.85 per share, which was worse than Wall Street’s loss expectations of €0.63 per share.
Exhibit 1: Spotify Q2 Key Highlights
| Metric | Reported | Estimated | Year over Year change (%) |
| Revenue | €2.86 billion | €2.81 billion | 23 |
| Loss per Share | €0.85 | €0.63 | – |
| Monthly Active Users (MAUs) | 433 million | 428 million | 19 |
| Premium Subscribers | 188 million | 187 million | 14 |
| Ad Supported Revenue | €360 million | – | 31 |
Source: Company Financials, July 2022
A robust quarter led by advertising and subscriber growth
Spotify announced 433 million monthly active users in the second quarter, up 19% year over year and 5 million more than expected, despite the termination of its Russian business. According to the company, Gen Z’s strength in Latin America, account reactivations in Europe, and strong marketing initiatives, are all contributing factors to this rise. Paid subscribers also increased 14% to 188 million users year over year, exceeding expectations by a million users.
Exhibit 2: Region-wise Premium Subscribers Exhibit 3: Region-wise Monthly Active Users
Source: Company Financials, July 2022
Exhibit 3: Region-wise Monthly Active Users
Source: Company Financials, July 2022
Spotify has managed to keep up its investment in advertising. Ad-supported revenue for the quarter was another major success, increasing 31% to $360 million and accounting for an all-time high of 13% of the overall revenue.
Spotify is still the king of music streaming
The biggest music streaming service in the world, Spotify, is still far ahead of its rivals. The platform is responsible for approximately a third of all music streaming listeners globally, with Apple Music coming in second with 15% of the market. Before Apple (AAPL) introduced its own platform, Spotify, one of the earliest music streaming services, had more than 50 million subscribers. Although market share has decreased as other services have launched, Spotify has maintained its position. With a 13% market share each, Amazon Music and Tencent Music tie for third place. Despite the fact that the Chinese government has not restricted Spotify or Apple Music, the two most important platforms in China are Tencent and NetEase.
Exhibit 4: Global Streaming Music Subscription Market
Source: MIDiA Research, November 2021
Spotify sees a rosy third quarter
Exhibit 5: Spotify’s Projections for Q3 2022
| Metric | Forecast (Q3 2022) | Past Performance (Q3 2021) |
| Revenue | €3 billion | €2.5 billion |
| Total MAUs | 450 million | 381 million |
| Total Premium Subscribers | 194 million | 172 million |
Spotify gave a positive guidance for the third-quarter. According to the company, Spotify plans to attract over 17 million new monthly active users in the third quarter, bringing its total to 450 million. It anticipates registering 194 million paid members in the quarter, indicating a 6 million gain. Spotify CEO Daniel Ek announced that the company plans to proactively cut headcount by 25%. Ek stated that he is optimistic based on what he is currently witnessing, even if he is bracing for things to get worse. On the call, CFO Paul Vogel stated, “We continue to monitor the global macro outlook, but to date, have seen no real impact on our user or subscriber outlook.”
Exhibit 6: Spotify Stock Price Performance History
| CMP | YTD | 1-Year | 3-Year | 5-Year |
| $119.73 | -50.96% | -46.06% | -22.76% | -19.06% |
Source: MSN Money, Data as of last close on August 8, 2022
Exhibit 7: Analyst Ratings on Spotify Stock
| Brokerage | Rating | Price Target ($) | Upside Potential (%) |
| Citigroup | Buy | 145 | 19.6 |
| Keybanc | Overweight | 148 | 22.1 |
Source: Benzinga.com, August 8, 2022
Starbucks reports record revenues, thanks to Gen Z’s love for coffee
Starbucks announced better-than-anticipated quarterly earnings and revenues thanks to a surge in demand for its cold coffee drinks in the United States. The coffee giant reported a 9% rise in third-quarter revenue to $8.15 billion, whereas earnings fell from $0.99 per share in the same quarter last year to $0.84 per share this year. The company claimed that this quarter’s profitability was negatively impacted by inflation and higher barista wages. The company reported a 3% increase in global same-store sales, driven mostly by improved results in the United States.
Exhibit 8: Starbucks Q3 Key Highlights
| Metric | Reported | Estimated | Year over Year change (%) |
| Revenue | $8.15 billion | $8.11 billion | 9 |
| Earnings per Share | $0.84 | $0.75 | -15 |
Source: Company Financials, August 2022
Exhibit 9: Starbucks Total Revenue (in USD Billion)
Source: Company Financials, August 2022
Inflation is not a concern for coffee lovers
Despite the rise in inflation that worried the investors about future consumer spending, demand for Starbucks coffee remained unaffected. Howard Schultz, the chain’s interim CEO, claimed that consumers are not buying less or spending less. Whereas, at McDonalds (MCD) and Chipotle Mexican Grill, low-income customers have visited less frequently or spent less due to their tighter budgets caused by rising petrol and grocery costs. Wall Street is now concerned that Starbucks, a market leader that has maintained growth throughout the financial year, could be damaged by a prospective economic slump. As evident from the quarterly results, it seems that global consumer demand for the brand is still robust. Schultz attributed Starbucks’ ability to resist the trend to its pricing power and loyal customer base.
United States is still the leading segment for Starbucks
Same-store sales rose 9% in Starbucks’ domestic market, with a 1% increase in traffic. Higher average order value was the major factor driving higher revenues. As consumers return to their pre-pandemic routines, morning sales are resuming and accounting for almost half of the revenue. The firm also cited the success of its iced shaken espresso and claimed that this quarter’s sales in the United States were primarily comprised of cold beverages. According to Schultz, customers are more likely to modify cold drinks than hot drinks by adding modifiers like syrups and milks, which increases the cost of the final product. Gen Z Customers, a crucial coffee company market, also enjoy cold drinks.
Same-store sales outside of the United States declined 18% due to a decline in Chinese demand. Starbucks said for two-thirds of the quarter, COVID limitations in China impacted sales in its second-largest market. As a result, China’s same-store sales subsequently fell 44%. Periodic short-term closures are still happening to the company in China.
Starbucks continues to increase its physical presence
The company added 318 net new stores during the quarter, bringing its total number of outlets to 34,948, out of which 51% is owned by the company and 49% are licensed. Starbucks stores in the United States and China represent 61% of its total portfolio. At the end of the third quarter, the company had 15,650 stores in the United States and 5,761 stores in China.
Exhibit 10: Total Number of Global Stores
Source: Company Financials, August 2022
Outlook
Starbucks did not give any future guidance for the next quarter. However, the company intends to have an investor day on September 13 to discuss more of its future ambitions. Investors and analysts are quite worried that the inflationary impact and a potential recession may hamper the company’s business but Starbucks is well positioned and well prepared to battle these challenges.
Exhibit 11: Starbucks Stock Price Performance History
| CMP | YTD | 1-Year | 3-Year | 5-Year |
| $85.72 | -26.53% | -27.32% | -10.99% | 61.19% |
Source: MSN Money, Data as of last close on August 8, 2022
Exhibit 12: Analyst Ratings on Starbucks Stock
| Brokerage | Rating | Price Target ($) | Upside Potential (%) |
| Deutsche Bank | Buy | 93 | 8 |
| Barclays | Overweight | 96 | 11.5 |
Source: Benzinga.com, August 8, 2022
