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Is Spotify Technology's stock recession-proof?

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Many investors are likely to own shares Spotify technology (spot -3.00%) Because they are familiar with the service. With streaming gaining momentum in the entertainment industry, Spotify seems like a good bet. But with the stock down 50% year-to-date, investors are probably wondering how resilient Spotify’s business is in a slowing economy.

We often hear the word “recession” these days. This is often associated with periods of depressed gross domestic product (GDP). This has come to the fore recently after the US recorded its second straight quarter of GDP decline. A weakening economy will affect certain sectors, such as advertising, which Spotify relies on. Ad-supported streaming plans are used by more than half of monthly active users.

But despite the economic headwinds, Spotify’s stock surged following its second-quarter earnings report in July. The music streamer saw strong growth in monthly active users and revenue. This suggests that Spotify could be a more recession-proof business than market participants realize.

Why the Market Loved Spotify’s Quarter

Management reported no material impact from the economy, but recently took precautionary steps to cut jobs in case market conditions worsen. CEO Daniel Ek said: , said it has noticed that some markets are doing better than internal forecasts.

Spotify has reported slowing monthly active user growth throughout 2021, and this has been a key factor that appears to weigh on the stock’s performance. However, that streak has come to an end. In the first and second quarters, Spotify reported steady growth in monthly active users, with a 19% increase in the first half.

Still, Spotify’s outlook shows user growth slowing again. Monthly active users in the third quarter he reached 450 million, he is expected to grow 18% year-on-year. But that hardly matters.

Especially after the streaming pioneer’s recent struggles, investors seem happy that the subscription service posted double-digit increases in users and revenue. netflixhas struggled to grow its subscriber base over the past two quarters.

In fact, Spotify’s 23% year-over-year revenue growth looks pretty good alongside 9% growth for the leading video streamer.

Spotify’s results aren’t surprising given the huge tailwind behind it. After nearly 15 years of drought, US recorded music revenues are booming thanks to streaming.

A graph showing how music revenue has increased exponentially over the past five years.

So far, Spotify seems like a must-have service for users. Even with the possibility of recession. Spotify reported that its subscriber churn rate, or cancellation rate, in the second quarter was in line with expectations and, most importantly, decreased year over year.

Risks to watch out for with Spotify

While monthly active user growth is steady, there are some potential hurdles to watch out for.

First, management attributes the 14% increase in premium subscribers to an extra week of promotions in the quarter. This could cause problems later if the economy continues to deteriorate and consumers who joined Spotify through promotional offers are unwilling to pay the subscription fee.

The 2022 Digital Consumer Sentiment Survey reveals why some subscription services are struggling to grow this year. The survey found that in a sample of 1,054 US adults, 43% of respondents chose to cancel his subscription online this year. Because it costs too much. This contrasts with 20% who said they wanted to consolidate their services and 18% who canceled after the promotional price offer ended.

Another risk to watch is the digital advertising spending market. Social media companies are facing significant downward pressure on revenues this year as advertisers hold back spending in an uncertain economic environment. Ad-supported users make up his 59% of Spotify’s total monthly active users.

Ad revenue, however, was only 12.6% of total revenue last quarter, so it’s not a big part of Spotify’s business. In addition, the company reported that its advertising revenue grew 31% year-over-year, and management expects solid growth in the third quarter.

No business may be perfectly recession-proof, but Spotify is in a stronger position than most other streaming services and remains a great long-term investment.

John Ballard has a position at Netflix. The Motley Fool holds positions with and recommends Netflix and Spotify Technology. The Motley Fool’s U.S. headquarters has a disclosure policy.