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Spotify not raising prices reveals 'competitive weakness': Analyst

Spotify's (SPOT) decision not to raise prices on its U.S.-based premium subscription plan speaks volumes about the music streaming giant's lack of pricing power. At least according to one bearish analyst.

"[It's] a strategic play. It speaks to the relative competitive weakness of their business compared to these bigger firms that have bigger, larger platforms that bring a lot more to the table," New Constructs CEO David Trainer told Yahoo Finance Live, referring to recent price hikes from both Apple Music (AAPL) and YouTube Premium (GOOGL).

"Firms like Google and Apple are making tons of money. They can afford to lose a lot of money in streaming music and podcasts without even blinking an eye. Spotify can't," Trainer said.

"It's going to be really difficult for [Spotify] to make a lot of money and compete with firms that can offer a very similar service along with a whole lot of other services."

The Spotify logo is displayed on a screen on the floor of the New York Stock Exchange (NYSE) in New York, U.S., May 3, 2018. REUTERS/Brendan McDermid
The Spotify logo is displayed on a screen on the floor of the New York Stock Exchange (NYSE) in New York, U.S., May 3, 2018. REUTERS/Brendan McDermid (Brendan McDermid / Reuters)

Spotify's total monthly active users topped expectations in the fourth quarter, the company reported on Tuesday. Monthly users totaled 489 million in Q4, beating forecasts for 478 million with both premium and ad-supported subscribers topping estimates.

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Premium subscribers grew 10 million in the quarter to reach 205 million; ad-supported users jumped by 22 million to total 295 million. Spotify said it expects subscribers to reach 500 million at the end of the first quarter.

Still, the company reported a wider-than-expected loss amid higher personnel costs primarily due to headcount growth, higher advertising costs, and currency movements.

Operating expenses grew 44% year-over-year as a result, although the company continued to categorize 2022 as a peak investment year with significant improvements expected in 2023.

"The next era of Spotify is one where we're adding speed plus efficiency — not just growth at all costs," Spotify CEO Daniel Ek said on the company's Q4 earnings call. "That's a big shift...but now we're going to have to live up to that."

Trainer, though, was not convinced, calling out the company's negative operating margin of -7.3%. "As long as margins are negative, [there needs to be] pretty extreme cost cutting," Trainer said. "That's going to be difficult in order to maintain market share and maintain growth."

Spotify stock, which lost more than two-thirds of its value in 2022, surged more than 12% on Tuesday following the company's report. The stock is down more than 65% compared to its February 2021 record high.

"There's a disconnect here between valuation and the underlying economics and fundamentals of the business," Trainer said. "[Spotify] is an unprofitable business that's been burning through a lot of cash."

"It needs to do whatever it can to get their profitability, but there are going to be trade offs to that path to profitability that make it difficult for the business to grow into its valuation. It's going to be tough."

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

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