What happened
Shares of Spotify (SPOT 11.41%) collapsed by 32.7% in April, according to S&P Global Market Intelligence. The audio streamer reported better-than-expected earnings for the first quarter, but the stock was dragged down by the general sharp decline among consumer internet and technology stocks last month. It is also possible that investors are losing faith in Spotify's continued investments in non-music segments.
So what
On the morning of April 27, after a month-long share price slide, Spotify reported its Q1 financials. Revenue came in at 2.66 billion euros and earnings landed at 0.21 euros per share. Both numbers beat analysts' consensus expectations, but instead of reacting to that with positivity, investors further sold off the stock in the session that followed the report.
Image source: Getty Images.
Three issues may have been driving that negativity. First, Spotify is not seeing any leverage on the gross margin line, though management promised that was coming due to its investments into podcast content and advertising. Gross margins were 25.2% in Q1, down from 25.5% in the prior-year period. Over the long term, executives think Spotify can achieve gross margins in the 30% to 40% range. That would help the company finally generate consistent net profits and cash flow. However, so far, that margin expansion hasn't materialized, and it is likely that many investors are doubting whether those numbers are achievable.
Second, Spotify's advertising-supported revenue growth was a bit weak in Q1 -- only 31% year over year. Its results were hindered by the closure of its Russia operations in response to that nation's invasion of Ukraine, but this pattern could be concerning if it continues over the next few quarters. Spotify has made over $1 billion worth of investments into podcast content over the last few years. The way it plans to monetize these investments is through advertising.
Third, consumer internet stocks have been hammered over the last few weeks. Netflix's weak report made a lot of investors nervous about how these companies will fare in a recessionary and/or inflationary environment. Time will tell which companies will be significantly affected, but right now the market is pricing all these digital businesses as if the coming macroeconomic conditions will severely hurt their financials.
Now what
As of this writing, Spotify has recovered a bit of its April losses, and its market cap is back up to $21 billion. But the stock is still down by 46% in the last three months and is not far above its all-time low. If you believe in the company's margin expansion story, its expansion into podcasts, and the growth of music streaming, this could be a great time to buy Spotify stock -- because it looks like very few people agree with you anymore.
