Spotify (SPOT) stock continued to slide Wednesday after the company’s disappointing third-quarter earnings results.
Shares were down 13% at the close, as analysts from JPMorgan, Morgan Stanley, Pivotal Research and Jefferies all lowered their price targets for the stock. So far in 2022, the music streaming giant’s shares have lost more than 63%.
Here is the platform’s performance compared to Bloomberg consensus estimates:
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Revenues: $3.01 billion, expected $2.99 billion
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Adjusted loss per share: -$0.99 versus -0.82 expected
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Total monthly active users: 450 million versus 456 million expectations
Despite a narrow decline in both revenue and total monthly active users, investors remained overly focused on the platform’s wider-than-expected loss, beating expectations of 25.2% alongside the platform’s 24.7% drop in gross margin.
The company was responsible for the loss, along with the renewal of a major publishing contract outside of the US, as well as softness in the advertising market. The slowdown in ad spending was felt in the tech industry as YouTube ad revenue fell $400 million below estimates as buyers tightened budgets amid rising inflation and interest rates.
Spotify continues to spend aggressively as other tech giants give up due to unfavorable macroeconomic conditions.
The company reported 65% year-over-year operating expense growth, citing increased staff costs mainly due to staff additions, as well as 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 accelerated purchases. Spotify recently signed deals with Podsights, Findaway, Sonantic, Chartable, Whooshkaa, and Heardle.
“Many investors are questioning whether Spotify can deliver significant sustained profitability (especially given the intense strength of music companies and competition that is not focused on profitability),” Pivotal Research Analyst Jeffrey Wlodaczak said in a new note to clients. “The results/outlook provide no evidence to the contrary.”
Wlodarczak, who maintains the Hold rating for the stock, cut its price target from $105 to $100 per share, noting that investors will have to play the long game between short-term risks.
“Spotify’s 30-35% gross margin target seems reasonable [in the long-term (2027 and beyond)]but at least for now we are in a market (especially in Europe) focused on short-term profitability and the increased likelihood of a global recession,” the analyst explained.
Going forward, Wlodaczak emphasized that the potential rise 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 probably have to continue to be patient,” the analyst said.
Spotify said in its earnings call that it is actively exploring raising prices on its US-based subscription tiers. Both Apple Music (AAPL) and YouTube Premium (GOOGL) have recently raised prices on their plans.
He told additional investors, “It’s one of the things we want to do, and that’s a conversation we’re going to have with our label partners in light of these recent developments.” “I feel good about next year and what the pricing of our service means.”
Alexandra is Senior Entertainment and Media Correspondent at Yahoo Finance. follow him on twitter @alliecanal8193 and email her at alexandra.canal@yahoofinance.com
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