Spotify Stock Plummets Over Margin Concerns, Not Neil Young – Billboard

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Spotify shares fell as much as 18.9% on Thursday (Feb. 3) on worries the company’s effort to improve its margins will take longer than previously believed.

On Wednesday, the streaming company revealed it expects its first-quarter gross margin to be 25.0%, well under the 26.5% from the previous quarter and 25.5% in the same quarter in 2021. Also in the fourth-quarter earnings release, Spotify showed it closed 2021 with 180 million subscribers, up 16% year over year, and annual revenue of 9.7 billion euros ($10.9 billion), up nearly 23%.  But investors appear impatient for a long-term strategy to play out. Spotify’s share price reached $155.58 and closed at $159.70, down 16.8% on the day, wiping out about $6.25 billion of market value.

Wall Street has long understood that technology companies such as Spotify face difficult margins because of music licensing costs that typically take about 70% to 75% of revenue. Spotify’s solution was build its podcasting business by investing hundreds of millions of dollars in content production and technology platforms. By reducing its reliance on music and increasing the number of creators on the platform, Spotify believes it can reach a gross margin in the 30% to 40% range. But to reach that long-term goal, Spotify will need to make more investments that will erode its margins in the short term.

Wells Fargo analyst Steven Cahall, who dropped his price target from $200 to $153, called the gross margin guidance an “eyebrow-raiser” in an investor note. Rosenblatt Securities analyst Mark Zgutowicz lowered his price target from $350 to $220, citing the lower-than-expected gross margin and a longer time horizon for Spotify’s podcast strategy to play itself out.

Spotify’s emphasis on podcasting led to the current headache it’s been dealing with for the past week over Neil Young’s decision to pull his catalog in protest of COVID-19 misinformation on the platform’s top podcast, The Joe Rogan Experience. Young was followed by Joni Mitchell, Nils Lofgren, Graham Nash and India.Arie.) Whether or not the controversy will impact advertising or user growth is unknown. (CEO Daniel Ek said during an earnings call Wednesday, such controversies “are measured in months and not days.”) But Spotify is adamant that spoken-word content — including audiobooks — is vital to its goal of reaching 1 billion listeners globally and adding more money to its bottom line.

To get there, Spotify must make investments that “may slightly alter the progress we’ve seen in the consolidated gross margin over the past few years,” CFO Paul Vogel admitted during Wednesday’s earnings call. Previous efforts to improve margins have “given us the conviction to increase our investments in certain areas,” said Vogel. The strategy will take time, however, and Cahall believes Spotify “will need to show the fruits of these investments to win back the street.”

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