Spotify stock sinks another 13% post-earnings as investors digest declining margins

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

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

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

  • Income: $3.01 billion versus 2.99 billion expected

  • Adjusted loss per share: -$0.99 versus -$0.82 expected

  • Total monthly active users: 456 million versus 450 million expected

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

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

Spotify continues to aggressively spend as other tech giants have let up 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 growth initiatives targeting emerging markets and Gen Z.

In addition to doubling down on podcasts and audiobooks, the platform has also ramped up 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 Spotify’s platform

“Many investors question whether Spotify will ever be able to generate significant lasting profitability (especially given the concentrated power of the music labels & competition not necessarily focused on generating profitability),” Pivotal Research Analyst Jeffrey Wlodarczak wrote in a new note to clients. “The results/outlook do not provide evidence to the contrary.”

Wlodarczak, who maintained a Hold rating on the stock, slashed his price target from $105 a share to $100, noting that investors will have 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 heightened possibility for a global recession (in Europe in particular),” the analyst explained.

Moving 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 can generate profitable growth.

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

Spotify CEO Daniel Ek speaks during 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 now also provide video content and podcasts.  REUTERS/Shannon Stapleton

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

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

“It is one of the things that we would like to do, and this is a conversation we will have in light of these recent developments with our label partners,” Ek told investors. “I feel good about this upcoming year, and what it means about pricing for our service.”

Alexandra is a Senior Entertainment and Media Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at alexandra.canal@yahoofinance.com

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