Spotify had its worst day since its 2018 IPO on Thursday as its share price fell victim not only to a weaker-than-expected outlook for the first quarter and a change in the way it provides guidance to investors, but also larger trends on Wall Street. The broader market hurt several tech stocks, including Facebook parent Meta, as investors scrutinized whether the companies had become overvalued.
Spotify stock fell 17% during trading in New York on Thursday with extremely high trading volume. The stock’s closing price of $159.76 was the cheapest Spotify stock in over a year. Its share price however recovered on Friday since it rose by 6% at midday.
The drop came a day after the company announced a lackluster outlook for the first quarter and surprised investors that it would only provide a quarterly outlook, not a full-year guidance. “We are aligning our guidance practices with how we run the business, as most of our investments are multi-year in nature and the exact timing of any specific launch may vary in any given year,” the CEO said. CFO Paul Vogel to analysts on a conference call.
Barclays technology analyst Mario Lu said the move “will likely raise investor concerns about the company’s short-term trajectory beyond the first quarter.”
Wells Fargo media analyst Steven Cahall agrees the lack of investor guidance is baffling to some investors. But he said the real “frown” in Spotify’s quarterly results was the estimate that its profit margin would be 25% in the first quarter. This is 1.5% below what Wall Street expected. Cahall said the ‘fading dream’ that the hundreds of millions of dollars Spotify spent in 2020 to grow its podcast business would begin to pay off in 2022. “Term remains undetermined,” Cahall said in a note to customers.
Despite weaker-than-expected margins, Lu said Spotify’s core business was showing positive signs, including double-digit gains in monthly active users, a 34% increase in ad revenue, and strong recovery metrics. podcast that indicate the benefits of having both music and spoken audio on one app.
“The lack of guidance for the full year is arguably disappointing, but the reality is that they’re just moving to a Netflix-like guidance structure, and to be right after Covid, the medium forecast term are difficult,” said Jeffery Wlodarczak, analyst at Pivotal Research. “We are still in the midst of a global consumer shift towards streaming music consumption,” he added in a report to customers.
But Cahall said Spotify’s profit margins are expected to remain slowly growing, if not worsen, as it spends more on content, advertising and new technology. This would mean that the red ink would remain.
Spotify lost $34 million in 2021. That was an improvement from losing $581 million in 2020. But Cahall said he thinks “patience is running thin” to move into profitability.. “We believe Spotify will need to show the fruits of these investments to reclaim the streets,” he said.. Cahall lowered his price target for Spotify shares to $153 from $200 previously.
The sellout that hit Spotify was not limited to the streamer. Overall, the market fell, with the tech-heavy Nasdaq down 3.7% on Thursday as some of the biggest tech stocks saw steep declines. Meta’s stock plunged 27%, wiping out more than $200 million in market value from parent company Facebook on its worst day of trading since the company’s IPO in 2012. Shares of Twitter and from Amazon also had a bad day.
“The problem that we have right now for earnings in general is that it’s not enough to have good earnings,” TD Ameritrade chief market strategist JJ Kinahan told CNBC. “You have to present a very good plan to move forward with a lot of optimism. ‘Good is not good enough’ is really the theme of this earnings season so far.”