Spotify shares tumble as investors question podcast investments

Spotify Technology SA has spent more than a billion dollars in an effort to become the No. 1 name in podcasting, but investors’ patience is wearing thin on how much that will cost.

The company said Wednesday that its gross margin is expected to stay flat this quarter relative to the 25.2% it reported in the first quarter. That guidance trailed analyst estimates and overshadowed an otherwise strong earnings report.

Spotify said spending on non-music content weighed on its results. The company hasn’t shared many specifics on the returns it’s seeing from podcasting, apart from saying that listening time reached an “all-time high” and that podcast engagement has outpaced total user growth.

“The company laid out long-term gross margin targets of 30-35% which it later raised to 30-40%,” said Bloomberg Intelligence analyst Geetha Ranganathan in an email. “But with gross margins in the 20s and no margin expansion for this year given the higher investments, it’s just fanning the flames of the bear thesis of the poor economics in the model.”

Spotify shares tumbled as much as 13%, touching their lowest levels since the stock’s direct listing in April 2018.

Rich Greenfield, general partner at LightShed Ventures, said the lack of transparency is hurting the company. “There’s a massive disconnect between what investors want and what Spotify is doing,” he said, adding that Chief Executive Officer Daniel Ek is looking at a long-term play versus an immediate payoff for investors. 

‘Very Simple’

“It’s very simple,” Greenfield said. “They’ve been investing in podcasting for a couple years and this market is unwilling to wait on investment returns.”

Ek and Chief Financial Officer Paul Vogel painted an optimistic picture of the business and encouraged investors to think on a long timeline. In the first quarter, Spotify withstood the controversy around podcast host Joe Rogan to reach 182 million paid subscribers and 252 million ad-supported users. Revenue reached 2.66 billion euros ($2.8 billion), and even though an exit from Russia cost it 1.5 million users during the quarter, the company mostly landed on its feet.

“We’ve talked about this in the past, but we see the core business that’s been around for a while having steady consistent growth with improving trends,” Vogel said on a conference call with analysts Wednesday. “And we’re going to continue to invest against the business that we think is setting us up for not just the next couple of quarters, but the next five to 10 years and that’s what you’re seeing in some of those numbers.”

Ek said the company expects the ceiling for audio consumption hours to be double or triple from where they are currently in more mature markets. There’s “plenty of growth left ahead,” he said.

Ranganathan said Netflix Inc.’s earnings debacle last week makes it tougher for investors to buy into Spotify’s focus on long-term growth, even though she thinks that’s the right strategy for the company.

“It gives the skeptics too much ammunition at a time when the market is scrutinizing profitability for the streaming model,” she said.

Ek pushed back against the comparison between Spotify and Netflix on the call, saying the two companies have many differences.