For newly public companies, Wall Street often gets too excited about the growth. This means there’s a good chance of a disappointing earnings report.
And yes, this appears to be the case with Spotify Technology SA (NYSE:SPOT). The music streaming operator, which came public last month, had a less-than-stellar earnings report. So in early trading, SPOT stock was off by 10% to $153, though it has since started to recover.
Let’s take a run-down on the quarter. Revenues rose by 26% to €1.14 billion, which were in-line with Street expectations. But the bottom line was another matter. SPOT reported a net loss of €173 million or €1.01 per share. Yet the analysts’ consensus was calling for €0.23 per share.
The growth for paid subscribers was also on the light side. The company reported 75 million users but the average estimate was for 75.1 million. Then again, SPOT did show more strength with ad-supported users, coming to 99 million. This was 1 million better than the consensus.
What about the guidance? Actually, it was also a disappointment. For Q2, revenues are expected to range from €1.1 billion to €1.3 billion. But Wall Street was looking for €1.29 billion.
True, the performance was not necessarily bad. But again, Wall Street wanted much more.
More Details On the Quarter
Pulling off an IPO can be time-consuming. But for Spotify, management still was able to get a lot done. Here’s a look at some of the highlights of the quarter:
- SPOT launched its personalized discovery feature for its free tier. That is, a user can now listen to any song on their top 15 Spotify curated playlists at any time. Oh, and there is also Data Saver, which optimizes the streaming to use less mobile data.
- In mid-March, Spotify launched its service in Israel, Romania, South Africa and Vietnam. This brings the total to 65 countries and territories.
- Spotify struck deals with large podcast platforms, which has more than doubled the catalog.
- There was an expansion of the partnership with Hulu. It is now available on the Standard Plan.
Competition and SPOT Stock
Music streaming is definitely a major secular trend. According to a report from the International Federation of the Phonographic Industry, the global music market grew by 8.1% to $17.3 billion. Of course, much of this was from mobile and online platforms.
Yet this does not necessarily mean that Spotify stock is a sure-fire opportunity. The nagging problem is that the market is intensely competitive, as the company must battle mega operators like Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), Amazon.com, Inc. (NASDAQ:AMZN) and Apple Inc. (NASDAQ:AAPL). Although, AAPL could be the most threatening. As seen with the latest earnings report, the company has been aggressively ramping up its subscription businesses.
But on the Spotify’s conference call, CEO Daniel Ek was dismissive of the competition. He noted: “We don’t really think this is a winner-takes-all market. We don’t see any kind of meaningful impact of competition. In fact, we think multiple services will exist in the market, and we’re all kind of in that growing market.”
All this may be true. But it would be much more comforting — for those who own SPOT stock — if the CEO was more concerned about the competitive environment.
Bottom Line on SPOT Stock
Since the IPO, I’ve been bearish on SPOT stock. The big problem is that the economics are fairly tough. To keep up the growth, there needs to be significant marketing expenses. But there also must be significant payments for licensing of the content.
For the most part, music streaming is a low-margin business. It’s really more of a “loss leader” that is ideal for a company like AAPL, GOOGL or AMZN. They can bundle streaming with other services.
So while SPOT stock is somewhat cheaper now, I would still stay away.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
