Spotify Shares Fall Most Since 2022 on Operating Income Forecast

Spotify Technology SA shares plunged the most in more than four years after the music streaming leader gave a forecast for operating income in the second quarter that missed analysts’ estimates.

The Swedish company expects operating income of €630 million ($737 million) in the current quarter, it said in a statement Tuesday. That compares with analysts’ forecasts of €674.3 million.

Revenue gained 8% to €4.5 billion in the first three months of the year, in line with analysts’ forecasts for €4.53 billion, according to estimates compiled by Bloomberg. Spotify reported 761 million monthly active users, more than the 759 million Wall Street expected. Paying subscribers rose 9% to 293 million. But in the current quarter, the company is forecasting 299 million premium subscribers, shy of estimates for 300 million.

The results show the challenges facing the new co-chief executive officers, who took the helm earlier this year after co-founder Daniel Ek stepped back after almost two decades at the company. The shares fell as much as 15% as trading got underway in New York, the biggest intraday decline since February 2022.

After a big run up in shares last year, Spotify’s stock has slid 26% this year. Wall Street has yet to be fully convinced that the company has a plan to defeat artificial intelligence while also paring costs. At the same time, it’s facing competitive pressure from big tech companies like YouTube, Amazon.com Inc. and Meta Platforms Inc., where people also find distraction in music, books and podcasts.

“Based on the miss on premium subscribers and operating income outlook, we’re not surprised to see shares trading down,” analysts at Citi Research wrote in a note to investors.

Spotify long ago shifted from a music-only destination to offer a broad spectrum of audio and video programming, including books, podcasts and, most recently, a partnership with Peloton Interactive Inc. to bring more than 1,000 workout classes to the service. Gustav Söderström and Alex Norström, who took on joint leadership of the company in January, told Bloomberg News in an interview last year that their goal is to keep the platform valuable and inspiring to users. The co-chief executive officers believe people will want to continue subscribing to the service if they think their time on it is well spent.

The company is betting that people will find enough content they like to justify higher prices. Spotify raised the cost of premium subscriptions by 8% in the US in January to $13 a month, amid pressure from analysts to bring its prices in line with other consumer platforms like Netflix Inc. The company has fiercely loyal listeners who have spent sometimes years building music and audio libraries, making them reluctant to cancel.

Executives addressed analyst questions about profit margins on a call to discuss earnings, expressing confidence that they would continue to improve.

“We are very pleased with our gross margin progression,” Norström said. “Not just for this quarter, but consistently over the last three years. We have a very healthy core that spans music and podcasts and audiobooks.” And relating to gross margin, he said “this is a time of tremendous opportunity for us.”

The executives said the gross margin in the first quarter was a “short-term issue” and reiterated that they see growth picking up in the second half of this year.

Christian Luiga, chief financial officer, said the company plans to improve the metric year-over-year and is “very disciplined” in its investments.

Discipline came up numerous time throughout the call as the executives emphasized their spending is done in service of advancing growth at the company — like by using AI to assist with product development and to market new features to consumers — not to hire more employees.

The advertising business has continued to challenge the company with ad-supported revenue decreasing 5% in the first quarter from a year earlier..

We get reaction from Geetha Ranganathan, US Media Analyst for Bloomberg Intelligence.

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