Audio-streaming veteran Spotify Technology (SPOT 2.60%) reported robust third-quarter results by most measures. The company added 7 million premium subscribers and 23 million monthly active users (MAUs) during the quarter. In addition, revenue rose 21% year over year, driven by healthy subscription fees. That's more than a healthy business -- the results were downright impressive.

Yet investors reacted to Spotify's report with a brutal haircut. The stock fell more than 9% in Wednesday's morning session, extending a painful downtrend. Spotify shares have lost roughly 60% of their value in 2022.

This time, the negative market move sprang from Spotify's disappointing sales of advertising space. Ad-supported revenue increased just 3% year over year on a constant currency basis. That segment barely squeaked out a gross profit at a gross margin of 1.8%, down from 10.8% in the year-ago period.

Indeed, Spotify's management saw no reason to complain about this quarter -- apart from the troublesome advertising business, that is.

"There's a lot of global uncertainty. But for Spotify, our business continues to perform very nicely around the world," Spotify CEO Daniel Ek said on the earnings call. "And outside ads, we aren't seeing much impact at all."

So what's going on inside this unique spot of difficulty? Let's have a look.

The view from the CFO's office

On the earnings call, Spotify's management team spent plenty of time discussing the market for digital audio ads. The company was a pure subscription service until it launched an ad-supported option in 2017. A sophisticated ad-buying platform, the Spotify Audience Network (SPAN), was added in early 2021.

So the advertising business is just a few years old. Still, Spotify has already amassed 273 million ad-supported MAUs and the segment accounted for 13% of total revenue in the third quarter.

CFO Paul Vogel pinned the soft advertising growth on macroeconomic issues broadly. Most of the underperformance fell in the Europe, Middle East, and Africa (EMEA) market, where the war in Ukraine weighs heavy on local economies and many important markets are experiencing even steeper inflation than the U.S. And Spotify paused its services in the United Kingdom on the passing of Queen Elizabeth II, resulting in another unforeseen revenue slowdown.

Vogel noted that advertiser interest was building momentum in October, suggesting that the next quarter could deliver stronger ad sales. However, the difference wasn't large enough to support rosy guidance for the ad-based segment, given the inherently unpredictable nature of today's global economy.

On the upside, Vogel sees this slowdown as a macroeconomic issue that should fade when broader market challenges have passed, as they will. No bear market lasts forever. He supported this conclusion with a quick analysis of the rising number of ad buyers on the SPAN platform.

"The fact that we're seeing that up year-on-year and continue to grow shows us that the overall structural health of the ads business that we are building at Spotify is very healthy," Vogel said.

The view from the CEO suite

Ek added some valuable color commentary to Vogel's statements. First and foremost, he underscored the temporary nature of Spotify's limited ad growth.

"The important thing is to decide whether this is a cyclical or a structural thing. And it's our firm view that this is more cyclical than structural," Ek said, "So the long-term growth of digital advertising is still going to be healthy, we believe, and there's more off-line dollars that's going to move to digital dollars."

Ek also found an upside to the macroeconomic pressure. The sharp sting of the coronavirus pandemic in the first half of 2020 showed that digital ad slots were plentiful and affordable when most advertisers restricted their ad spending. Therefore, Spotify was able to boost its own advertising budget and rake in millions of new users at a low cost.

The growth-boosting upside is playing out again in this market, and management isn't too concerned with the top-line impact on a 13% slice of the incoming revenue stream.

"This would then offer us a clear opportunity to grow our market share even in a challenging economy because we can acquire users at a lower cost relative to [their lifetime value]," Ek said.

Should Spotify's stock be this cheap?

Spotify's commentary suggests that the advertising downturn has stabilized over the last couple of months, but it's still too early to wave the victory flags. The underlying macroeconomic issues must be addressed before the ad market symptoms can improve to a meaningful degree.

This guarded analysis makes sense after similar reports from online advertising giants Alphabet and Meta Platforms this week. Both technology titans reported disappointing results and took sizable hits to their stock prices.

At the same time, I would argue that Spotify's mostly subscription-based business model serves as an effective shield against the advertising sector's softness. Both premium and ad-based subscriber numbers are soaring, and Spotify's cash profits have been solidly positive for years.

In other words, Spotify's stock should be on the rise, but share prices have fallen by 64% in 2022 anyway. Trading near all-time lows at historically low price-to-sales and price-to-free-cash-flow ratios, Spotify looks like a fantastic buy -- despite the tough digital advertising market.

SPOT PS Ratio Chart

SPOT PS Ratio data by YCharts