Shares of Spotify Technology (NYSE:SPOT) started the morning down by over eleven percent thanks to poor fourth quarter guidance from the company. Today’s news is a great example of how a company can perform well but still get hit on the stock market due to future guidance.
At first glance, it’s a bit surprising that the company saw its worst day on the stock market in over 6 months. Take, for instance, Spotify’s earnings numbers from the third quarter.
The company reported $48.9 million in earnings versus an expected loss of $40+ million. Spotify also increased revenue to $1.54 billion, up over 31 percent from the same quarter a year ago. Not only that, but the music streaming industry leader also boasted a new high of 87 million premium subscribers, up from 83 million in the second quarter.
Taken in a vacuum, those are great numbers both in absolute terms, as well as against analyst estimates ahead of the earnings report. But that didn’t stop Spotify shares from opening today over 11 percent down (currently down about 5 percent as of this writing).
Spotify’s fourth quarter guidance and commentary are what caused today’s sell-off
Spotify management reiterated a fourth-quarter revenue forecast that stopped short of earlier estimates. The firm is seeing a rise in family and student plans that, while boosting paid-for subscriber count, earning around 6 percent or less per user than its more typical subscriptions do.
In addition, they plan to ratchet up spending on research and development as well as new growth initiatives. With both Apple Music (NASDAQ:AAPL) and Pandora hot on Spotify’s trail, the company doesn’t want to let off the gas peddle when it comes to innovation. All of this spending will dampen margins for the short-term and that’s why investors aren’t looking favorably at Q4 – increased spending with revenue projections coming in flat isn’t a great recipe for earnings.
SPOT stock is now trading a few percentage points below its opening-day closing price of $149.01 and some analysts are standing behind Spotify with an eye towards the long term.
Jessica Reif is an analyst at Bank of America and was encouraged by paid-for revenue growth of 31 percent YoY.
“SPOT delivered better 3Q18 results, reflecting in-line premium subscriber gains, stronger average revenue per user and slightly lower than expected ad-supported monthly active users,” says Reif. “We believe substantial headroom exists for continued SPOT gross margin growth and equity value creation.”
Bank of America currently has issued $230 price target, representing a 50 percent upside, and a “buy” rating for the Stockhold, Sweden-based company.
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