- Spotify (SPOT) stock posted a 6.4% gain on Thursday.
- That pop came the day after a post-earnings crash that saw SPOT stock hit a new all-time low.
- SPOT stock is temptingly cheap and its first quarter earnings were a massive beat of analyst expectations, but smart investors would be wise to avoid this company.
Growth stocks — especially tech stocks — have suffered in 2022. We know that. However, the misery for music and podcast streamer Spotify (NYSE:SPOT) has been ongoing for nearly a year. Since closing at an all-time high of $364.59 last February, SPOT stock has been in free fall. That culminated in a $96.67 close on Wednesday. The all-time low came after the company reported first quarter earnings. It amounted to a 73% decline in value over the course of just 14 months.
What makes Wednesday’s SPOT stock rout more interesting is the fact that the company actually delivered a decent quarter. Results included diluted earnings-per-share of 21 cents that blew away Wall Street’s expected 24 cent loss. The company also reported a revenue beat for the quarter, with a 24% year-over-year increase. Monthly active users grew 19% for the quarter and premium subscribers were up 15%.
Why did SPOT stock crater despite what looked like solid results? Part of the issue was guidance for flat margins in Q2. But there are much bigger concerns about the company and its business model, which I’ll get into. The message for long-term growth investors is to stay away from Spotify. Thursday’s pop shows SPOT stock can still offer upside, but there are too many questions about the company’s long-term prospects to take that risk.
Spotify Is a Focal Point for Controversy
Being in headlines can be good for business. Being constantly in headlines for the wrong reasons is a sign that something may be fundamentally wrong with a company. And Spotify has been a headline magnet.
For example, the company’s payment rate for musicians has been a constant source of friction and protests. Streaming is far from lucrative for artists, but Spotify has been a constant target for its low rates. Rival Apple (NASDAQ:AAPL) pays royalty rates double those of Spotify.
In addition, Spotify is losing its high profile, exclusive podcasting deal with Barack and Michelle Obama. Their production company Higher Ground is moving to a partnership that supports podcast releases on multiple platforms. Whatever the reason for the departure, the departure reflects poorly on Spotify.
Spotify seems to be a magnet for controversy. This pattern is concerning when it comes to the long-term growth of the company. The media frenzy earlier this year over artist boycotts, and then the Obamas leaving was nothing but bad news for SPOT stock.
Netflix Provided a Warning of What Could Happen to Spotify
Spotify is the market leader for streaming music and podcasts. It has been in that business since 2006. Netflix (NASDAQ:NFLX) is the market leader for streaming video. That company has been in business since 1997, launching its streaming service a decade later.
Both companies have dominated their respective markets and both started their streaming services at about the same time. Each has had years to solidify its lead before competition began to heat up. Both are now facing strong rivals and their overall marketshare is slipping. Apple Music continues to challenge Spotify with features like lossless music and spatial audio. It also has the advantage of being pre-installed on every iPhone, iPad and Mac Apple sells.
Last week, Netflix stock collapsed after reporting that it had lost subscribers for the first time in a decade. It was down 200,000 for the quarter with warnings it could lose another 2 million in Q2. You can bet that analysts are looking at Spotify and wondering whether the same thing could happen. I suspect it’s less a question of “if” than “when.” Given that Spotify is a much less financially healthy company (it continually struggles to turn a profit), a hit like the one Netflix took would be even more damaging.
It’s no coincidence that SPOT stock dropped 8% on the Netflix earnings news.
Should You Buy SPOT Stock?
There’s a certain appeal about being able to buy a high-flying tech stock for considerably less than its IPO price, five years years after that IPO and while the company is dominating its market. That may seem like a sure bet, but in the case of Spotify there is little to suggest better times ahead. I would stay clear of SPOT stock, even at its near-record low price.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.