Spotify Stock Jumps. Why Shares Are Climbing After Layoffs.

Investors were cheering the job cuts because they make it more likely that Spotify will post a profit next year—the first time since it went public in 2018.

In midday trading, the stock was up 7%, to $193.34. Shares have more than doubled this year.

Spotify has been in growth mode since it went public, often at the expense of profits. As of the end of the third quarter, it had 226 premium subscribers and 574 million monthly active users.

But the streaming service, which pays labels and music-rights holders the majority of the money it makes from subscriptions, hasn’t hit its profitability goals. That could change now that it’s cutting expenses and looking to pass more costs on to consumers.

This year, Spotify raised its prices on individual streaming plans in the U.S. for the first time since 2011. After a loss this year, analysts expect the company to post per-share earnings of $1.54 in 2024.

Last week, analysts at Citi wrote that Spotify still faces challenges. It will probably be hard for the company to keep adding subscribers at the same pace, and income per subscriber is likely to slip.

“A reduction of this size will feel surprisingly large given the recent positive earnings report and our performance,” Ek said in the memo. “Yet, considering the gap between our financial goal state and our current operational costs, I decided that a substantial action to rightsize our costs was the best option.”

The job cuts are “about preparing for our next phase, where being lean is not just an option but a necessity,” Ek said in the memo.

Write to Brian Swint at brian.swint@barrons.com