'They've gone too far': How Spotify dug a giant hole — and how it can dig itself out

On February 19, 2021 Spotify (SPOT) shares closed at a record high of $364.59. The company's market cap was north of $69 billion.

Today, the stock is trading below $80 a share, down roughly 70% in 2022 and off nearly 80% from that record close. Its current market cap? $15 billion.

In the last several years, Spotify has sought to broaden its business from one that charges users to stream music into the leading business in the entire audio market.

"We believe our market that we're going after is audio," Spotify CEO Daniel Ek said in a 2019 interview. "And that's going to be at least a billion, probably 2 or 3 billion people around the world, that would want to consume some form of content like that on a daily or weekly basis."

Ek said if the company is going to "win that market," meaning audio, they'd need "at least a third" of this multi-billion user opportunity. "We're still very early days in our journey," Ek said.

In the intervening years, Spotify has spent $1 billion pushing into the podcast market, signing on celebrities like the Obamas, Prince Harry, and a Kardashian. The company paid $230 million to acquire podcast studio Gimlet in 2019. Spotify then paid a reported $200 million to bring Joe Rogan exclusively to the platform, and another $200 million for The Ringer in 2020.

But after a disastrous 2022 for investors, Spotify's dive into podcasting raises key questions about the company at large:

• Does the business model work?

• How long until sustained profitability?

• Is the streaming service losing core appeal for the younger audiences, who are the most avid music consumers?

• Has its CEO lost credibility with investors?

The answers to these questions hold the key to whether Spotify can mount a turnaround in the eyes of investors in the years ahead.

Peak investment year

Spotify's most recent results once again disappointed on the bottom line, after the platform reported a wider-than-expected loss of ($0.99) per share in the third quarter and another quarter of declining gross margins, which came in at 24.7%, missing expectations for 25.2%.