Spotify Stock Tumbles as Pandemic Dents User Growth

Music streaming leader Spotify (NYSE: SPOT) reported second quarter earnings on Wednesday morning, which showed that user growth in certain key markets was negatively impacted by the COVID-19 pandemic.

That revelation overshadowed the fact that Spotify reported better-than-expected overall results, with ad revenue surging thanks to the company’s ongoing push into podcasts.

As of 11 a.m. EDT, Spotify stock had tumbled by 8%.

The pandemic takes a toll on engagement

Revenue in the second quarter increased 23% to €2.33 billion, or approximately $2.75 billion based on current exchange rates. That top line result beat the consensus estimate of €2.29 billion in sales.

Spotify conceded that monthly active users (MAUs) “fell short of our guidance range,” as the company temporarily paused some of its marketing efforts in countries such as India and Brazil that were hit especially hard by the virus in the second quarter.

Total MAUs reached 365 million, shy of the Swedish company’s forecast of 366 million to 373 million. The good news is that MAU trends started to improve near the end of the quarter and Spotify remains confident in overall user retention.

Premium subscribers grew 20% to 165 million, ahead of Spotify’s expectations. Premium average revenue per user (ARPU) declined modestly to €4.29, but ARPU was flat on a constant currency basis.

When excluding foreign exchange fluctuations, ARPU benefitted from price increases that Spotify rolled out across numerous markets in the first quarter.

Advertising revenue surged 110% to €275 million, driven by strong sales execution in Spotify’s direct and podcast channels. It’s worth noting that the broader advertising industry had pulled back spending in the second quarter of 2020 as the pandemic escalated, leading to favorable comparisons now. 

Spotify reported a net loss of €0.19 per share, which was significantly better than the €0.41 per share in red ink Wall Street analysts were expecting.

Mixed guidance for the rest of the year

As a global company attempting to grow in many emerging markets where the COVID-19 pandemic continues to rage, Spotify is exposed to considerable macroeconomic risks related to the contagion. 

Spotify expects to have 377 million to 382 million MAUs at the end of the third quarter, with 170 million to 174 million premium subscribers. Revenue is forecast in the range of €2.31 billion to €2.51 billion. 

The company also adjusted its guidance for 2021. By the end of the year, total MAUs are now expected to be in the range of 400 million to 407 million, compared to the previous outlook of 402 million to 422 million.

On the bright side, premium subscribers should be 177 million to 181 million, an improvement relative to the prior guidance of 172 million to 184 million.

“Given the extraordinary operating circumstances we currently face with respect to the impact of COVID-19, there is a greater likelihood of variances with respect to those ranges than typical quarters,” Spotify warned in its letter to shareholders.

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Evan Niu, CFA owns shares of Spotify Technology. The Motley Fool owns shares of and recommends Spotify Technology. Millennial Money is part of The Motley Fool network. Millennial Money has a disclosure policy.

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