Why Spotify Technology Shares Crashed on Wednesday

What happened

Shares of Spotify Technology (NYSE:SPOT) fell as much as 10.1% on Wednesday, following the company’s second-quarter earnings report. The results exceeded most of Wall Street’s expectations, but investors were quick to focus on the business update’s disappointing details instead.

So what

Spotify’s second-quarter sales rose 23% year over year, landing at $2.75 billion. Your average analyst would have settled for $2.23 billion. On the bottom line, net losses shrank from $2.26 to $0.22 per diluted share. The number of monthly active users (MAUs) increased 22% year over year to 365 million. Premium subscriber growth clocked in at 20% while ad-supported MAUs rose by 24%.

The MAU figure came in just below the bottom end of management’s guidance range for the quarter, while premium subscribers and top-line revenue nestled up to the top end of their respective guidance ranges instead.

A person wearing headphones in the back seat of a car, with rain hitting the side window.

Image source: Getty Images.

Now what

Spotify expanded its music streaming and podcast services to 80 new markets in the first quarter, driving strong growth across the income statement. The company also raised subscription prices in more than 30 markets earlier in the spring. Bearish investors are pairing the price increases with soft MAU growth, and many arrive at the conclusion that the service is more sensitive to higher prices than management had expected.

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CFO Paul Vogel rejected that sentiment on the earnings call. Vogel pointed out that premium subscriber growth actually landed near the top of Spotify’s guidance. Instead, he explained, a technical issue with email verification systems made it difficult to sign up for any kind of Spotify service for a couple of weeks, and that was the real reason behind the unsatisfactory MAU sign-ups. The problem has been fixed, but the company lowered its full-year MAU guidance to reflect the second-quarter weakness.

The company is doing almost everything right. I think it’s a mistake to focus on a temporary user growth slowdown since Spotify’s long-term prospects look fantastic. I’m a buyer of Spotify shares at these lower prices.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.


View more information: https://www.fool.com/investing/2021/07/28/why-spotify-technology-shares-crashed-on-wednesday/

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