Why Spotify Stock Dropped Today
Key Points
Spotify is gaining both free users and paid subscribers.
Growth-related spending should fuel further expansion, but at a cost.
- 10 stocks we like better than Spotify Technology ›
Shares of Spotify Technology (NYSE: SPOT) fell on Tuesday after the audio streaming platform issued a tepid profit forecast.
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Steady user and subscriber growth
Spotify's monthly active users (MAUs) increased 12% year over year to 761 million in the first quarter. The gains came even as the streaming marketplace grew increasingly crowded. Spotify competes with well-heeled rivals like Amazon, Apple, and Alphabet's YouTube.
"We surpassed 760 million MAU, delivered on the subscriber growth we aimed to achieve, and saw healthy engagement from existing users, reactivations, and new users alike," Co-CEO Alex Norström said in a press release.
The Swedish audio technology company's premium subscribers -- who pay for ad-free music, better sound quality, and other features -- rose by a more modest 9% to 293 million. Spotify raised subscription prices in the U.S. in February, which may have discouraged some free users from upgrading.
All told, Spotify's total revenue grew by 8%, or 14% excluding currency fluctuations, to 4.5 billion euros ($5.3 billion).
Spotify's price hikes helped to drive its gross margin higher by 1.3 percentage points to 33%. Its operating income, in turn, jumped 40% to 715 million euros ($838 million).
A lackluster forecast
However, investors appeared to focus more on Spotify's guidance. Management guided for operating income of 630 million euros in the second quarter, due in part to higher spending on marketing and new artificial intelligence (AI)-powered features. Wall Street had expected second-quarter operating income of nearly 680 million euros.
Still, looking further ahead, Co-CEO Gustav Söderström believes these investments will bear fruit for the company, its users, and its shareholders.
"We see significant room to grow across users, formats, and engagement, and to expand what Spotify is and can become over time," Söderström said.
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Joe Tenebruso has positions in Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, and Spotify Technology. The Motley Fool has a disclosure policy.
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