Spotify’s decision to lay off 17% of its staff is the leading technology story of the morning, and I wouldn’t fault you if you were a little confused why it is doing so. After all, the music streaming company just reported positive operating income and nine figures’ worth of free cash flow in the third quarter.
Well, the short answer is: Corporate and market fundamentals.
Spotify has grown into a truly massive company. In the third quarter, its revenue rose 11% to €3.36 billion from a year ago, which put it on a roughly €13.4 billion run rate. That’s a lot.
But even though the company is raking in revenue and profit (last year it reported an operating loss and far-slimmer free cash flow), it isn’t getting the sort of respect from investors that it once enjoyed. It’s likely Spotify wants to earn that respect again.
Here’s a chart showing Spotify’s price-sales ratio, a trailing metric that is the grown-up version of the revenue multiple standard that we tend to use for startups: