What happened
Shares of music-streaming giant Spotify (SPOT 0.20%) fell as much as 13.9% in trading on Tuesday after the company reported second-quarter 2023 earnings. Shares are hitting their lows at 12:00 p.m. ET and are continuing to decline.
So what
Revenue was up 11% in the quarter to 3.18 billion euros, but the company reported a 247 million euro operating loss and only 9 million euros of free cash flow. Investors were expecting improving costs as Spotify cut expenses earlier this year, but that hasn't materialized yet.
On the positive side, Spotify increased monthly active users by 7% sequentially to 551 million, and premium subscribers were up 17% to 220 million. That's tremendous growth ahead of the price increases announced yesterday but haven't helped the stock.
Now what
The market is now focused on profitability, and Spotify isn't there yet. Ad-supported subscriber growth hasn't turned into enough premium subscriber growth to make a dent, and cost reductions haven't materialized yet.
For long-term investors, the company is clearly on a path to financial improvement. Lower-than-expected gross margins and higher operating costs included one-time expenses because of recent layoffs and real estate losses, which will ultimately drive value. But investors have been impatient by the pace at which costs have been coming down.
I think the drop today is a great buying opportunity for long-term investors because the most important driver of long-term growth -- user engagement -- is up significantly in the quarter. It'll take more time for investments in advertising and artificial intelligence to play out, but the path to Spotify becoming a great growth stock is clear.
