moved closer to profitability in the second trimester and has shown that it can attract big advertising dollars, but the music streaming company has failed to hit the one metric investors are watching more closely: growth in user numbers.
That’s why stocks were down sharply on Wednesday. Questions about user growth could weigh on the title in the near future.
Spotfy shares (ticker: SPOT) slipped 8.2% at the start of the session. After more than doubling in 2020, the stock is down more than 20% this year.
Spotify lost 22 cents a share, beating analysts ‘estimates for a loss of 43 cents, and delivered positive operating income, despite analysts’ expectations that it would post a loss. The company also exceeded Wall Street’s revenue expectations.
But Spotify’s second-quarter growth in user numbers and its growth projections for the second half were worrying. Spotify added 7 million “premium” subscribers, who pay monthly for ad-free music, to reach 165 million. This matched Wall Street estimates. But it added just 2 million ad-supported users – those who have free access to music but listen to ads between songs – in the quarter, reaching 210 million. In the first quarter, Spotify had added 9 million ad-supported users.
Spotify’s total monthly active users reached 365 million in the quarter, up 22% year-over-year. This is down from growth of 24% in the first quarter and 29% a year ago.
Spotify said the pandemic caused growth to slow during the quarter – the company even removed advertising in some areas with severe cases – and it had an issue with a third-party-run enrollment program. But the company does not appear to be catching up enough in the second half of the year to meet investor expectations.
Citi analyst Jason Bazinet noted that Spotify’s expectations for the third and fourth quarters were lower than analysts had predicted. Spotify forecast between 377 million and 382 million monthly active users for the third quarter, below expectations of 391 million. And its fourth-quarter range of 401 million to 407 million was lower than analysts’ estimate of 415 million.
Premium subscribers are a more stable source of revenue than ads and account for over 80% of Spotify’s revenue. But ad-supported customers also play an important role in Spotify’s growth, with many eventually becoming premium subscribers, the company said. And advertising is becoming a growing source of revenue for Spotify, accounting for 11.8% of revenue for the quarter, down from 6.9% a year ago. In the last quarter, advertising revenue jumped 155%.
Spotify has also capitalized on exclusive podcasting deals with figures like Joe Rogan to attract new subscribers. But this bump no longer seems to be the source of the growth in subscriber numbers. And these deals are costing the company dearly, Rogan is said to have signed a salary of $ 100 million and others are said to have secured deals for tens of millions of dollars as well.
Investors have been willing to put up with Spotify’s lack of profitability for years, in the hopes that its rate of growth would make up for it. But a slowdown means the valuation could be reset. That was certainly the case on Wednesday.
Write to Avi Salzman at firstname.lastname@example.org