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  • Earnings
  • disruptive innovation

Why did the Spotify share price drop post-earnings?

The Shopify [SPOT] share price fell 5.74% on 28 July, following mixed second-quarter results. Investors and traders weighed in on the slower-than-expected growth in monthly active users (MAUs), sending the Spotify share price lower.

 

Spotify share price falls on monthly active users miss

During the second quarter, Spotify added 9 million new MAUs, bringing the total to 365 million, which was below its own estimate range of between 366 million to 373 million. This marks the second time in a row that the company has missed forecasts. During the first quarter, MAUs grew 24% year-on-year to 356 million, again missing internal expectations.

The music streaming service blamed the coronavirus pandemic and a technical issue on a third-party platform for a slowdown in growth. The streamer now expects MAUs to come in between 377 million and 382 million for the third quarter, and between 400 million and 407 million for the full-year.

Among the brighter notes were premium subscriber numbers hitting 165 million, up 20% year-on-year, and at the top end of Spotify’s expectations. Advertising was also a growth area for Spotify, with direct and podcast sales channels leading to €275m in sales – a 110% year-on-year surge.

€275million

Valuation of direct and podcast Q2 sales - a 110% YoY rise

  

Diluted losses per share came in at $0.19, narrowing the $1.19 per share loss seen in the same period last year. Revenue for the quarter came in at  €2.33bn, up 23% year-on-year

“Most of our major metrics – subscriber growth, revenue, gross margin, and operating income – performed better than expected this quarter. The exception was MAUs, where we fell short of our guidance range,” the company said in its quarterly letter to shareholders.

Spotify’s guidance for third-quarter revenue is between €2.31bn and €2.51 billion on operating losses of between €80m and break even.

 

What’s happening with the Spotify share price?

The Spotify share price hasn’t been making many investor playlists recently. Since the start of July, the stock has slipped 10.2% (as of 28 July’s close). Those falls were, in part, caused by UK MPs urging the regulator to investigate the music streaming site over how it pays artists.

The Spotify share price slipped just over 2% on 15 July after UK MPs called for fairer pay for artists. A report from the government’s Digital, Culture, Media and Sport Select Committee found that artists on the platform were being paid a pittance (0.003p per stream) and called for the Competition and Markets Authority to launch an investigation.

“Spotify was created to solve a problem – piracy and music distribution. The problem was to get artists’ music out there. The problem was not to pay people money” - Jim Anderson

 

Responding to the report, Jim Anderson, who helped create the platform said: “Spotify was created to solve a problem – piracy and music distribution. The problem was to get artists’ music out there. The problem was not to pay people money,” reports i newspaper.

Any resulting change to Spotify’s revenue model would obviously hurt sales or result in costs being passed on to the consumer. And even the threat of an investigation is enough to send the Spotify share price downwards.

 

Where next for the Spotify share price?

The year so far, hasn’t exactly been a smash hit for the music streaming service, with the Spotify share price falling circa 29% (through 28 July). But is focusing on Spotify’s subscriber numbers in the hope of a bounce back too myopic?

Despite wider market bearishness due to the Delta variant, JDP Capital Management analysts have tipped Spotify shares to perform well and buck that trend. This is predominantly due to the company’s recent elevation from a “purely consumer-facing product to a monetisation tool for talk and music asset owners”. Making this possible are recent innovations like ‘Greenroom’ and ‘Open Access Platform’. The analysts also like Spotify's global footprint now reaching 178 countries.

“In May we had added to the position at an average price of $217. Although this price was roughly 80% higher than our 2018 basis, we think the upside is more compelling now than when we initially invested” - JDP Capital Management analysts

 

“We think investors are missing the boat by trading the stock based on short-term KPIs like changes in premium subscribers. In May we had added to the position at an average price of $217. Although this price was roughly 80% higher than our 2018 basis, we think the upside is more compelling now than when we initially invested,” wrote the JDP Capital Management analysts in a note to investors.

The Spotify share price has an average $323.18 price target from analysts tracking the stock on Yahoo Finance – hitting this would see a 69% upside from its 27 July close.

Disclaimer Past performance is not a reliable indicator of future results.

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