Chapter 1: What earnings are being discussed in this episode?
Earnings season has been historically rough, but today seems to be the exception. We're breaking down fourth quarter earnings for three controversial rule breakers today on Motley Fool Money. Today is Tuesday, February 10th. Welcome to Motley Fool Money.
I'm your host, Emily Flippen, and today I'm joined by Fool analysts Jason Hall and Toby Bordelon as we break down earnings from three of the most popular rule-breaking stocks out there. Now, guys, I know we know which companies are reporting ahead of time, so of course, we had an idea of what we wanted to cover today.
But what we didn't know was that somehow these three companies would be breaking the mold of an otherwise really rough earnings season.
So I don't know about you, but for me, it's really nice to have some positive news today as we're going to dive into Datadog and whether or not its fourth quarter earnings really show that this usage-based observability platform is more insulated than other software companies, as well as Ferrari, which saw its worst day on record last quarter after guidance came in weaker than expected.
Was management sandbagging? We'll get there first. But of course, we have to start with my favorite of the bunch, which is Spotify. Now, Spotify basically needs no introduction. It's the audio listening platform that everybody loves to hate.
There's probably people listening to us on Spotify right now, Emily.
Exactly. Exactly. And I will say, if you had alternatives, maybe you would go to alternatives. But Spotify continues to deliver a superior product that people continue to flock to. And to your point, Jason, there aren't a lot of alternatives out there that's offer that superior product. That's part of the reason why they added a record number of monthly users this quarter.
I think they hit 290 million paid subscribers. It's been a really rough year for Spotify prior to reporting earnings this season, but this quarter was incredible. I mean, what stood out to me was an operating margin north of 15%. There's always this overhang about Spotify of, okay, good. They have the users, they have the engagement, but can they monetize it?
This quarter showed the highest operating margin ever for Spotify. That's what stood out to me. But Jason, to your point, what stood out to you?
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Chapter 2: How is Spotify converting free users to paid subscribers?
Look, revenue growth is already slowing down. This is the slowest revenue growth since 2018, I think, that we've seen. But profitability is growing as they focus on efficiency.
They're setting the stage for future growth beyond what we're seeing by rolling out music videos, for instance, expanding the audiobooks to new markets, focusing on live events, personalization driven by AI, which may increase that perceived value that you're receiving from your subscription, that sort of thing. I think they're doing exactly what you want them to do.
in terms of pushing beyond the core to bring in more services and features to that platform to keep that growth going. If not in the core business, because eventually you can't, the overall business as they continue to grow what they're doing.
What year does Spotify buy Netflix? That's my question.
I'm daring to dream there, Jason. I will say the big mistake that I think investors make with companies like Spotify, myself included, by the way, is assuming that things do have to slow. We tend to discount innovation and optionality in business models. We tend to extrapolate the world as we know it today. I know when I put together a financial model, I put in expectations around how
everything operates today. If it continues in this direction, where is the company? But there's sometimes optionality and variability built into platforms that is simply unpredictable today. And I think that's really where the rule-breaking traits and investing come into the equation.
Because what you're doing in that case is really investing in a management team, investing in a vision, in innovation, the things that you quite literally can't put into a spreadsheet. And while maybe Spotify has a lot of challenges ahead of it, I don't want to say that this is a the quintessential Netflix in the making, to your point, Jason.
I do think that it is a good example of the type of company that is hard to piece together as just the sum of its parts. Up next, we'll be diving into Datadog, which is one of the most confounding players, in my opinion, in observability and what its fourth quarter earnings say about software stocks as a whole. This is Motley Fool Money.
In January of 1915, Ernest Shackleton's ship, Endurance, became encased in the ice in the Weddell Sea. Through determination, grit, and savvy, Shackleton would lead his men through a brutal winter, then over hundreds of miles of Antarctic ice, followed by 800 miles across some of the roughest waters in the world.
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Chapter 3: How is Spotify innovating to enhance user experience?
They tell you that you can order it.
That's what it's going to be. It's not going to be orders open on our website. It's going to be, here, customer, you're eligible to order one of the first EVs off the line. It's actually not a line for them. Again, these are custom-designed, custom-made, very, very different models.
You know someone who knows someone who works at Ferrari who's able to get you in if you could afford the price tag. That's how they keep their brand power.
Either way, the common thread across Ferrari... Pulling back from 48% to 20%, maybe that even raises the value. Yes, exactly. They're creating more exclusivity. This is the Ferrari playbook.
It's worked out well for them in the past. No reason to think it's different today. And this is a management team that understands and knows its customer well. And I would actually say that's true for Datadog and Spotify as well.
These are management teams that really fundamentally understand their business and they meet their customer, whether that be the people who use their platform or the people who advertise on it. They meet their customer where they're at.
And I think that's part of the reason why each of the fourth quarters that we saw posted today from these world breaker companies were as great as they were in an otherwise really challenging environment. Either way, it's been incredible to actually have some good news to talk about on the Motley Fool Money podcast today.
Otherwise, I will say, I guess we're all back to our scheduled depression, doom, and gloom as we seek the other challenges in the market. But it's a great reminder that there are some silver linings and great opportunities still out there in an otherwise challenging environment. Jason and Toby, thank you both so much for joining and sharing your insight with us today.
As always, people on the program may have interest in the stocks they talked about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows The Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provide for informational purposes only.
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