Spotify stock sinks another 13% after earnings as investors dig into shrinking margins

Spotify (SPOT) stock continued to sink on Wednesday following the company’s disappointing third quarter earnings results.

Shares were down 13% at the market close, with analysts from JPMorgan, Morgan Stanley, Pivotal Research, and Jefferies, among others, all reducing their price targets on the stock. So far in 2022, shares of the music-streaming giant have fallen more than 63%.

Here’s how the platform performed compared to Bloomberg consensus estimates:

  • Income: $3.01 billion vs. 2.99 billion expected

  • Adjusted loss per component: -$0.99 vs. -$0.82 expected

  • Total monthly active users: 456 million compared to 450 million expected

Despite a small beat in both revenue and total monthly active users, investors remained hyper-focused on the platform’s wider-than-expected loss, along with a drop in its gross margins, which reached 24.7% — missing expectations of 25.2%.

The company blamed the loss on the renewal of a major publishing contract outside the US as well as softness in the ad market. The slowdown in ad spending was felt across the tech sector, with YouTube advertising revenue coming in $400 million short of estimates as consumers tighten budgets amid rising inflation and interest rates .

Spotify has continued to spend aggressively while other tech giants have held back amid unfavorable macroeconomic conditions.

The company reported operating expense growth of 65% year-over-year, citing higher personnel costs, primarily due to headcount additions, along with higher advertising costs for on growth initiatives targeting emerging markets and Gen Z.

In addition to doubling down on podcasts and audiobooks, the platform has also increased acquisitions. Spotify recently signed deals with Podsights, Findaway, Sonantic, Chartable, Whooshkaa, and Heardle.

"The Joe Rogan Experience" is one of the most successful podcasts on the Spotify platform

“The Joe Rogan Experience” is one of the most successful podcasts on the Spotify platform

“Many investors are questioning whether Spotify will be able to generate significant long-term profitability (especially given the concentrated power of music labels and competition that isn’t focused on generating profitability),” wrote Pivotal Research Analyst Jeffrey Wlodarczak in a new note to clients. “The results/views do not provide evidence to the contrary.”

Wlodarczak, who maintained a Hold rating on the stock, cut his price target from $105 per share to $100, noting that investors need to play the long game amid near-term risks.

“Spotify’s 30-35% gross margin target seems reasonable [in the long-term (2027 and beyond)]but we remain in a market that is, at least for now, focused on short-term profitability and an increased possibility for a global recession (in Europe in particular),” explained the analyst.

Going forward, Wlodarczak emphasized that potential upside will depend on higher gross margins, significant moderation in marketing spend, research, and development, as well as material free cash flow to bolster investor confidence that Spotify will generate profitable growth.

“Investors will likely need to continue to be patient,” the analyst said.

Spotify CEO Daniel Ek speaks at a press event in New York May 20, 2015. Spotify, which provides free on-demand music or ad-free tunes for paying customers, said it will provide it also has video content and podcasts.  REUTERS/Shannon Stapleton

Spotify CEO Daniel Ek speaks at a press event in New York May 20, 2015. REUTERS/Shannon Stapleton

Spotify indicated in the earnings call that it is actively exploring raising prices in its US-based subscription tiers. Apple Music (AAPL) and YouTube Premium (GOOGL) recently raised prices on their plans.

“It’s one of the things we want to do, and it’s a conversation we’re going to have in light of recent developments with our label partners,” Ek told investors. “I feel good about this upcoming year, and what it means in terms of pricing for our service.”

Alexandra is a Senior Entertainment and Media Reporter at Yahoo Finance. Follow him on Twitter @alliecanal8193 and email her at [email protected]

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