A raft of equity analysts lowered their price targets for Spotify’s stock following the company’s third-quarter earnings report on Tuesday, helping send the music streaming company’s share price down 13% to $84.42 on Wednesday (Oct. 26).
KeyBanc dropped its price target from $135 to $125, Barclays lowered its target from $164 to $135 and Raymond James cut its target from $150 to $110. J.P. Morgan analysts, who dropped the price target from $130 to $115, wrote in an investor note they were “encouraged” by fourth-quarter guidance on monthly active users and subscribers — 479 million and 202 million, respectively — but believes investments and foreign exchange will pressure fourth-quarter profitability. Spotify expects this quarter’s 300 million-euros ($303 million) operating loss to include a 95 million-euros ($96 million) negative impact from foreign exchange.
For most of its four-plus years as a public company, Spotify prioritized growth over profit and attracting new users. This year’s emphasis is winning over investors with larger margins while maintaining momentum. In an interview on Spotify’s For the Record podcast released Wednesday, CEO Daniel Ek admitted gross margins were hurt by “advertising [being] a bit softer than we would have liked” but insisted the results were fundamentally on point with the company’s expectations. “We still feel really good about the underlying core trends in the business,” he said. “We feel really good about where we think we’re going to end up over the next one to three years.”
That long-term vision is part of the company’s transition from a music-focused company to one that embraces many forms of audio entertainment. The early results show promise: Spotify users spending more time with the service and its churn rate – the fraction of subscribers that leave in a month – is “the lowest across our competitive set,” said Ek during the earnings call. Podcasting advertising is growing faster than music advertising, and the number of monthly active users that listened to a podcast great “in the substantial double-digits” year-over-year, according to a letter to shareholders.
But investors aren’t showing a great deal of patience — and not just with Spotify’s stock. Numerous tech stocks have fallen this week on less-than-stellar results and guidance. Alphabet’s stock price fell 9.6% after the company’s third-quarter earnings on Tuesday showed that revenue growth slowed to 6% from 41% a year earlier. What’s more, ad revenue at Alphabet’s YouTube, which beat Netflix in U.S. streaming TV viewership in September, according to Nielsen, fell 1.9% year-over-year in the third quarter.
Another bellwether of online advertising, Meta, fell 14.9% in after-hours trading Wednesday. The social media giant’s third-quarter earnings missing expectations on both revenue and earnings per share, according to Bloomberg, and its third-quarter revenue declined 4% from the prior-year period. Three months ago, Meta posted the first year-over-year quarterly revenue decline since going public in 2012.
Since Spotify is primarily a subscription business, it doesn’t face the same threat from advertising weakness as Alphabet or Meta. “Any headwinds in the advertising business for us, it’s just a lot smaller than it is for platforms that solely rely on ads,” Ek said during Tuesday’s earnings call. But advertising is crucial to the company’s podcasting business, an increasingly vital part of its long-term strategy to boost profitability. So far this year, Spotify’s heavy spending on its podcasting business has been a drag on margins. That’s to be expected, however, Ek and chief financial officer Paul Vogel repeatedly said during the earnings call and on the For the Record podcast. Next year, they pledged, podcasting will start to contribute to the bottom line.